Sunday, August 8, 2010

Ilargi: News has come in of the death of Matt Simmons late Sunday night. Matt will be sorely missed. Our thoughts are with his family.

Ilargi: I know I've suggested before that John Williams of the highly regarded Shadowstats.com site might be better at collecting data than interpreting them (something to do with that silly hyperinflation idea) , but I figured if I asked Stoneleigh to weigh in on a recent interview with him, she might just hammer that point home better than I could at the moment.

There are quite a few voices out there who -sort of- see what's going on, but who most of them go completely astray when it comes to the interpretation of the data; to what will come after. Stoneleigh and I have never had any doubts, other then in timing, i.e. another taxpayer trillion dollars straightening the ship for another month. John Williams sees a lot of it, which makes him an interesting guy to listen to. But on the flipside, he misses out on some of the perhaps most crucial parts of the entire story. Which is a shame.

Here's Stoneleigh:

Stoneleigh: There's an interesting interview at The Energy Report with John Williams of Shadow Stats ( John Williams: Times That Try Our Souls ), which I wanted to discuss because, while there are many aspects are we would agree with, there are other glaring differences with how The Automatic Earth sees the future unfold. It is worth looking at the article in some depth in order to find the source of the disparities.

Mr Williams' prediction is hyperinflation, although, like us, he is predicting a great depression. One major distinction between TAE's view and that of many inflationists is the definition of inflation. It is clear from the interview that Mr. Williams' definition is increasing prices. Readers of TAE will know that our definition is a monetary one - an increase in the supply of money, credit and velocity thereof relative to available goods and services. We have consistently pointed out that using a price definition of inflation removes all the explanatory and predictive value from the concept. Prices changes are lagging indicators of changes in the money supply, complicated by other factors, both globally and locally. For instance, global wage arbitrage has been a major factor driving prices down in recent years, despite a tremendous credit expansion.

Prices do not tell a story by themselves. It is necessary to assess price drivers in order to understand what is unfolding. It is then necessary to adjust prices for changes in the money supply in order to see what is happening to prices in real terms, as opposed to merely nominal terms. Prices in real terms show what is happening to affordability, as it is not price by itself that matters, but price relative to how much money one has in one's pocket.

Despite his call for an inflationary future, Mr Williams lays out the case for deflation, as defined in monetary terms:

JW: "If you strangle liquidity you always contract an economy and deliberately or not, liquidity is being strangled, resulting in sharp declines in consumer credit, commercial and industrial loans..... "

".....We're still seeing contractions in liquidity, and that's adjusted for inflation. In real terms, M3 money supply is down almost 8% year-over-year."

Williams also points out that the actions of the FED so far are not having an inflationary effect:

"The banks are not lending. The money the Fed put into the system in terms of buying mortgage-backed securities from the banks and trying to help bank liquidity ended up back with the Fed as excess reserves. We have well over $1 trillion there; had the banks loaned that money in the normal stream of commerce, it would have added more than $10 trillion to the broad money supply, which otherwise is up around $14 trillion. That certainly would have had some inflationary impact if not in terms of actual business activity. You can't always get the economy to grow by pushing money into it. Sometimes it's like pushing on a string.

It is indeed pushing on a string. Trying to stuff more credit into a system that is already choking on it will do nothing to increase the money supply in circulation. It cannot -even possibly- be inflationary. We are already in monetary contraction, as Williams has noted, and the contraction of credit makes the situation considerably worse than it appears from traditional money supply measures. Contraction is being aggravated by a fall in the velocity of money, as people, companies and banks hang on to what cash they have.

In a deflation, real interest rates are always higher than nominal rates. The real rate is the nominal rate minus inflation, and when inflation is negative, the numbers are added rather than subtracted. Even zero in nominal terms is not low enough to make the real rate sufficiently low to reignite borrowing and lending.

This is the liquidity trap, and governments are thoroughly caught in it already.

There is no chance that the money injected by the Fed will find its way into the real economy, and no chance that it will ignite a wage/price spiral in an era of credit contraction and rising unemployment. Employees will have no pricing power at all under such circumstances, which means that wages will fall rather than rise. Prices will also fall, as the withdrawal of credit will remove price support across the board. However, even as prices fall, affordability will be getting worse, because purchasing power will be falling faster than price.

People typically understand that inflation can make things less affordable over time, but deflation can do so much more quickly and much more comprehensively. The scenario that Williams describes is one of the effects of deflation, with real prices shooting up and everything becoming dramatically less affordable in a very short space of time.

We agree with Williams as to the prospects for the real economy in the near term:

"I expect an accelerating pace of downturn in the next couple of months. The numbers will turn sharply worse....

....By then we'll find the consensus pretty much in the camp that we're in a double-dip recession. The popular press will describe it as a double dip, but we never had a recovery. Actually, this is just a very protracted, very deep downturn that has had a pattern of falling off a cliff, bottoming out, having a little bit of bump due to stimulus and then turning down again. Sort of shaped like the path of a novice skier going down a jump for the first time. Speeding sharply down the hill, he goes up in the air and starts spinning wildly as he tries to figure out which end is up with his skis. Then he takes a pretty bad tumble. We're beginning to spin in the air."

We also agree with Williams as to the nature of the problem - credit expansion - and his observation that credit availability is decreasing:

"Most of the growth we'd seen in the last decade prior to this downturn was due to debt expansion. The debt structures have pretty much been put through the wringer and consumers are not expanding credit, generally because it's not available to them. Absent debt expansion and/or significant growth in income, no way can the consumer expand personal consumption."

Without the ability to expand consumption, there is no price support even at current levels, let alone a chance for prices to rise. Credit expansions are based on Ponzi dynamics - the creation of multiple and mutually exclusive claims to the same pieces of underlying real wealth pie, as opposed to cutting the pie into a larger number of smaller pieces as currency inflation would do. The Ponzi nature of credit expansion is the determining factor in the ultimate fate of all bubbles.

Like many inflationists, Williams describes a deflationary scenario, but then says that governments will simply print currency:

"But in this crazy, almost perverse circumstance, the renewed weakness to a large extent will help push us into higher inflation....The only option left going forward is for the government eventually to print the money for the obligations it cannot otherwise cover, which sets up a hyperinflation."

This projection does not recognize the power of the bond market, which is much greater than that of governments. Any government attempting to print actual currency is going to find that the bond market sends its interest rates through the roof in very short order.

Governments do not set interest rates.

They merely choose a rate to defend. If that rate is radically different from what the bond market thinks appropriate, then the government will bankrupt itself very quickly.

If the bond markets raise interest rates even marginally, while so many governments are very vulnerable to any increase at all, the result will be a tsunami of debt default, which is deflation by definition.

Again, as with most inflationists, Williams supposes that governments have the power to prevent extremely negative outcomes:

"Irrespective of the politics of big government spending, quantitative easing, renewed bailing out of banks, whatever is involved, I'd argue that the government still will do whatever it takes to prevent a systemic collapse....

....The federal government isn't going to let California or New York or Illinois collapse. Those are threats to the systemic survival. They're also going to spend a lot more to support people on unemployment."

Governments do not have the power that people imagine them to have. They cannot overcome the power of the collective, when that power is focused like a laser beam in one direction. Governments are going to find that the number of claims on their resources skyrockets, even as their tax receipts fall dramatically and their ability to borrow is curtailed by rising interest rates as a reflection of rising sovereign debt risk. Debt-junkie governments will be caught in a liquidity trap until the power of the international debt financing model is finally broken, as it will eventually be.

However, this does not happen overnight. Until it does, the power of governments to print will be sharply limited. We would expect this to remain the case through the era of deleveraging, which should last for several years. While inflation may be a long term threat once the power of the bond market is broken, that threat lies much further down the line. It is deflation that is today's threat, and deflation that people must prepare for right now.

We agree with Williams' diagnosis that a depression is imminent, but not his hyperinflationary rationale for it:

"I've been talking about an economic recession, but we are headed for something far worse. I define a depression as a 10% peak-to-trough contraction in the economy. In terms of the broad economy, we're not down 10% in GDP yet. So while we're not formally in depression, we're certainly seeing it in a number of indicators and I think we'll be in a depression, with GDP down 10%, in the near future.

A contraction greater than 25% peak-to-trough puts you in a great depression. That is what I envision, but we'll be taken there by hyperinflation and a resultant cessation of normal commerce."

Wiliams has a very different view than The Automatic Earth has of the relatively near-term prospects for the US dollar:

"We're getting extraordinary protestations from other central banks about the U.S. finances, its solvency, risk of the dollar. Before the current crisis you never would have heard any central banker making such comments. As this breaks, it's going to be obvious that the U.S. is moving to debase its dollar.

It'll have no option to do otherwise. I would fully expect some foreign holders looking to dump the Treasuries. With the dollar plunging, the Treasury won't be able to get the funding that it needs from a practical standpoint in the open markets.

The Fed will come in to salvage that situation, becoming the lender of last resort to the Treasury—literally monetizing the Treasury debt. The Fed might have a couple different ways to address the dollar situation, from raising interest rates to direct intervention, slapping on currency controls. I can't tell you exactly how it's going to go. But you'll have an environment that's effectively creating a perfect storm for the U.S. dollar."

The Automatic Earth says that the value of the dollar will increase sharply in the short term - over the next year or two - on a combination of a knee-jerk flight to safety into the global reserve currency and the deflation of dollar denominated debt. Both of these factors will create a demand for dollars, which should act to increase their value relative to other currencies for a period of time. We are not arguing that the dollar is a long term bet - far from it in fact. All fiat currencies eventually die, but now is not that time.

We have argued that people need to hold liquidity during the period of deleveraging, as the risks to cash will be lower than most other wealth preservation strategies. At the point when they can afford to do so without debt, which will depend on how much money they have to begin with, they need to move into hard goods. In doing so, they will prepare for an eventual bottom, at which point inflation should be a genuine threat. People need to be fully liquid at tops and fully invested (in hard goods in this case) at bottoms. In doing so they will be doing the exact opposite of the larger human herd, which is always the best prescription for success.

Williams holds a commonly-held view of the direction of oil prices, and their 'inflationary' impact (in price terms):

"Heavy dollar selling will be exceptionally inflationary. Oil prices will spike in response to the weakness in the dollar. Oil is a primary commodity that drives consumer inflation; that's how you can have inflation in a recession. The traditional wisdom is that strong demand against limited supply causes inflation, but you can also have inflation due to commodity price distortions, which is what we had back in '73 and what we've seen over the last year or so."

This is at odds with The Automatic Earth's view of where oil prices are heading in the short term. Our prediction is that falling demand (where demand is not what one wants, but what one can pay for) will lead to falling prices, but that more rapidly falling purchasing power (due to the collapse of the credit that represents over 95% of the money supply) will ensure that lower future prices will be less affordable than higher current ones.

We are predicting lower prices for oil initially, but are expecting demand collapse to set up a supply collapse down the road due to lack of investment in exploration, development and maintenance of existing infrastructure.

The financial crisis thus takes the pressure off in energy terms initially, at the cost of aggravating energy crises significantly in the longer term. Supply collapse will lead to skyrocketing prices in an era of tight money, when most people have very little purchasing power. It will also greatly increase the odds of a resource grab by governments seeking the ultimate source of liquid hegemonic power. Oil can be expected to lose fungibility, and ordinary people may be priced out of the market for fossil fuels entirely.

Williams offers a prescription for preparation that we would take issue with in a number of important respects:

"Hold some gold, silver, precious metals. I'm talking physical possession. Preferably coins because coins, sovereign coins, are recognized as such. They don't have liquidity issues. Having some assets outside the U.S., and certainly some assets outside the U.S. dollar, is a good thing. I like the Australian dollar, the Canadian dollar, the Swiss franc in particular. They won't suffer the same hyperinflation in Australia, Canada and Switzerland as we do in the U.S., so those currencies will tend to act as ways of preserving wealth. Over time real estate is a traditional store of wealth, but it's not portable and sometimes it's not liquid."

While (physical) precious metals have been money for thousands of years, and can be expected to hold their value over the long term, they are not ideal for those who are not exceptionally wealthy, i.e. those who can sit on them for perhaps 20 years without having to rely on the value they represent.

Those who would be forced to sell - into the ultimate buyers market of the coming years of deleveraging - would have been better off holding the cash that most will be seeking in the not too distant future.

Governments are very likely to seek to control assets as valuable as precious metals, as they did during the depression. Ownership could be banned and precious metals could be confiscated. It can be as challenging being too close to a source of great value as it is being too close to the centre of power in difficult times. It can mean constantly having to watch your back and never being able to trust anyone. Our view at TAE is that there are many things you could own which will serve you much better than precious metals.

We would agree with Williams' suggestion as to what kind of supplies to hold in order to have some control over the essentials of your own existence:

Most importantly, build up a store of supplies, more than you would normally consume over a couple of months, particularly food and water, canned goods. Having those goods can save your life in a number of ways. You'd have food to eat, and if you have extra you can use it to barter.

I met a guy who'd been through hyperinflation and found for purposes of the barter system those airline-size bottles of high-quality scotch proved quite valuable. Buy things that you would otherwise consume and rotate your inventory. Don't go out buying all sorts of things you'll never use. Keep what makes sense to you and your circumstances. Make sure you have things that are stable. Not too perishable.

While he suggests this as a hedge against inflation, we suggest it as a hedge against general economic disruption. Deflation is very likely to lead to a collapse of global trade, as letters of credit dry up and protectionism leads to retaliation-inspiring and -inspired import tariffs and trade wars. As we have a trade system built on long and vulnerable just-in-time supply lines, supply disruption under such circumstances is very likely. Holding one's own supplies of certain goods, along with liquidity, is therefore a good idea.

We have a great deal of respect for John Williams and what he has achieved with Shadow Stats, but it is always important to assess the foundation of people's predictions. Williams does not appear to accord sufficient significance to the role of credit and the effect of its evaporation during a Ponzi implosion. He also, in our view, chronically over-estimates the power of governments to control the way that events unfold. Outcomes are possible, indeed probable, that no one would choose. We simply do not have that choice to make. We will be at the mercy of the underlying logic of the system we have built during the expansion years, and that logic leads directly to a deflationary depression.

When Fed Chairman Ben Bernanke admits to seeing an "unusually uncertain" economy ahead, it's pretty terrifying to imagine what he's really thinking. What John Williams envisions—and he's by no means looking to the far horizon—is a systemic collapse, a hyperinflationary great depression and the cessation of normal commerce. Despite that bleak outlook, however, when the economist and editor of ShadowStats.com sat down for this exclusive Energy Report interview, he also had some good news.

The Energy Report: A few months back, John, you said, "if you strangle liquidity you always contract an economy and deliberately or not, liquidity is being strangled, resulting in sharp declines in consumer credit, commercial and industrial loans." Does this mean it would spur more economic growth if banks actually started lending?

John Williams: It sure wouldn't hurt. We're still seeing contractions in liquidity, and that's adjusted for inflation. In real terms, M3 money supply is down almost 8% year-over-year. It's the sharpest fall in the post -World War II era. It's not so much the depth of the decline in the liquidity or the duration, but the fact that the liquidity turns negative year-over-year that signals the economy turning down.

We had the signal in December of 2009 indicating intensification of the downturn, in this case, within six to nine months. We're in that timeframe now and see softening numbers. People are talking about a weaker economy. Even Mr. Bernanke has described the economy as "unusually uncertain" in terms of its outlook. Wording like that from the Fed is a pretty good indication that something's afoot.

TER: Why is M3 still contracting?

JW: Just as you noted, the banks are not lending. The money the Fed put into the system in terms of buying mortgage-backed securities from the banks and trying to help bank liquidity ended up back with the Fed as excess reserves. We have well over $1 trillion there; had the banks loaned that money in the normal stream of commerce, it would have added more than $10 trillion to the broad money supply, which otherwise is up around $14 trillion. That certainly would have had some inflationary impact if not in terms of actual business activity. You can't always get the economy to grow by pushing money into it. Sometimes it's like pushing on a string.

TER: And you say that a contracting money supply is a sure sign of trouble?

JW: When it contracts year-over-year adjusted for inflation, that's a signal for a downturn or an intensified downturn. It happens every time. Squeeze liquidity and business activity contracts.

On occasion, we've had recessions without a preceding downturn in the money supply. And sometimes, the money supply has turned positive but the economy has not followed—again, pushing on the string. Expanding money supply has led to upturns as well, so the Feds had to give it a try to stimulate the economy. But the one sure signal is the downturn. You don't get it often but it's very powerful when you do.

We're beginning to see the data break. Some unusual factors have been at work. I expect an accelerating pace of downturn in the next couple of months. The numbers will turn sharply worse. Consensus estimates are already moving in that direction and most everything will follow. Industrial production is still up but retail sales have been falling. Payroll numbers have been flat when you take out the effects of the census hiring. Those employment numbers will turn down in the next month or two, providing an important indicator of renewed economic contraction.

So we'll see how it develops, but we're at that turning point. It is happening as we speak. At the end of July, we got an estimate of the second quarter GDP, where the pace of annualized growth slowed to 2.4%. The early GDP estimates are very heavily guessed at, so most of the time you don't know if you're getting a positive or a negative number. You get a margin of error of plus or minus 3% around the early reporting. That happens also to be about average growth.

Nevertheless, on a quarter-to quarter-basis, I think we'll see GDP down again in the third quarter. With the bulk of the reported GDP in the first half due to inventory building, the stage for renewed contraction has been set. By then we'll find the consensus pretty much in the camp that we're in a double-dip recession. The popular press will describe it as a double dip, but we never had a recovery. Actually, this is just a very protracted, very deep downturn that has had a pattern of falling off a cliff, bottoming out, having a little bit of bump due to stimulus and then turning down again. Sort of shaped like the path of a novice skier going down a jump for the first time. Speeding sharply down the hill, he goes up in the air and starts spinning wildly as he tries to figure out which end is up with his skis. Then he takes a pretty bad tumble. We're beginning to spin in the air.

TER: But we've been in recession for three years now?

JW: The second leg that I'm talking about is the one now underway as we get to the middle of 2010. December 2007 is when this recession officially started, although I contend that it started earlier in 2007. At any rate, the economy plunged through 2008 and well into 2009. The numbers were pretty much bottom-bouncing during the second half of 2009. The auto deals and the homebuyer deals added a little spike to the growth pattern, but that growth was stolen from the future. It didn't create new demand.

Let me just clarify a bit. Recession, at least traditionally, was defined as two consecutive quarters of contracting real GDP growth adjusted for inflation. The National Bureau of Economic Research, the defining authority as to whether we're in a recession, will deny it, but at one time they used that general guideline as well. They've always used other numbers, too, such as employment and industrial production, trying to time the beginning or the end of a recession to a particular month. Significantly they did not call an end to this recession. They said it was too early to call, but I think they had a pretty good sense of what was going to happen. So what we're seeing now just looks like an ongoing deep recession. The next down leg is going to be particularly painful and I'm afraid particularly protracted.

TER: Can the governments pull any more stimulus levers yet this year?

JW: Oh, I think they'll try, but nothing much they can do will have anything other than short-term impact. If they write everyone a check, people go out and buy things. That would give the economy a quick boost but do nothing to change the underlying fundamentals or to correct the structural problems in this recession. Those are tied to the lack of robust growth in consumer income.

TER: So consumer income is a key factor.

JW: Absolutely. If you put in housing that's related to the consumer, that's three-quarters of the GDP. The average household is not staying ahead of inflation, and unless income grows faster than inflation, the economy won't grow faster than inflation—and that means that GDP is not growing. Income sustains consumption. When income grows, consumption grows. The only way to have sustainable long-term economic growth is to have healthy growth in income. You can buy some short-term economic growth, though, without growth in income, through debt expansion, which is what Greenspan tried.

Most of the growth we'd seen in the last decade prior to this downturn was due to debt expansion. The debt structures have pretty much been put through the wringer and consumers are not expanding credit, generally because it's not available to them. Absent debt expansion and/or significant growth in income, no way can the consumer expand personal consumption. You have to address employment, quality of jobs.

TER: You're suggesting that problems with the quality of jobs, if not the quantity, goes back to Greenspan—before the recession kicked in.

JW: Yes. A lot of high-paying jobs have been lost to offshore competition, to U.S. companies moving facilities offshore and to outsourcing offshore. That's been the primary driver of declining household income.

TER: We no longer really have the option of expanding the debt and it's doubtful that even short-term stimulus will have much impact. Looking at this next leg down against that backdrop, what projections would you make about unemployment, housing prices, GDP as we look through the end of 2010 and into '11?

JW: Unemployment will be a lot worse than most people expect. Housing will continue to suffer in terms of weak demand. But in this crazy, almost perverse circumstance, the renewed weakness to a large extent will help push us into higher inflation. Real estate tends to do better with higher inflation, but it's not going to be a happy circumstance for anyone.

The government is effectively bankrupt. Using GAAP accounting principles, the annual deficit is running in the range of $4 trillion to $5 trillion. That's beyond containment. The government can't cover it with taxes. They'd still be in deficit if they took 100% of personal income and corporate profits. They'd also still be in deficit if they cut every penny of government spending except for Social Security and Medicare. Washington lacks the will to slash its social programs severely, to change its approach to ever bigger government. The only option left going forward is for the government eventually to print the money for the obligations it cannot otherwise cover, which sets up a hyperinflation.

All of what I just described was already in place when the systemic solvency crisis broke. Before this crisis the government was effectively bankrupt. In response to the crisis, the government may have gone beyond what it had to do, but you err on the side of conservatism when you're trying to prevent a systemic collapse. That was a real risk. It still is. Irrespective of the politics of big government spending, quantitative easing, renewed bailing out of banks, whatever is involved, I'd argue that the government still will do whatever it takes to prevent a systemic collapse. That last series of actions had the effect of rapidly exploding the deficit. In just a year, we went from something under $500 billion in official reporting, on a cash basis as opposed to GAAP basis, to something close to $1.5 trillion.

TER: How big will that deficit grow in this second painful and protracted period?

JW: I can't give you a hard number, but I can tell you this. The markets came into this year on consensus projections that we'd have positive economic growth. Forecasts for the federal deficit, treasury funding, banking system solvency, etc. all were based on assumptions of recovery, of positive growth. Those assumptions presumably still underlie what I consider to be an irrational stock market.

But those projections and assumptions were wrong. We're going to have negative growth. The downturn will intensify. We're not in recovery. We have states on the brink of bankruptcy. The federal government isn't going to let California or New York or Illinois collapse. Those are threats to the systemic survival. They're also going to spend a lot more to support people on unemployment. Again, putting aside election year politics and such, the banking industry will need further bailout as solvency issues come to a head again. The federal deficit is going to balloon. It's going to blow up much worse than any formulas would give you, and Treasury funding needs will explode.

TER: Clearly you see us spiraling out of control.

JW: We've been talking about an economic recession, but we are headed for something far worse. I define a depression as a 10% peak-to-trough contraction in the economy. In terms of the broad economy, we're not down 10% in GDP yet. So while we're not formally in depression, we're certainly seeing it in a number of indicators and I think we'll be in a depression, with GDP down 10%, in the near future.

A contraction greater than 25% peak-to-trough puts you in a great depression. That is what I envision, but we'll be taken there by hyperinflation and a resultant cessation of normal commerce.

TER: Hyperinflation means different things to different people. How do you define it?

JW: My definition has been and will remain very simple. When the largest-denomination note in circulation—the $100 bill in the case of the U.S. dollar—has the same value as toilet paper, you have a hyperinflation. You saw that in the Weimar Republic. People papered their walls with money.

TER: I think you've said that the only reason that Zimbabwe's economy survived is because they started using dollars as black market currency.

JW: But you don't have anything like that in the United States as a backup. We're going to have a much rougher time in the U.S., of all places, than they had in Zimbabwe. Zimbabwe was able to function because people could exchange the local currency into dollars, and then buy things with the dollars, so the economy continued to function. Without some kind of a backup system, as the currency becomes worthless you'll see disruptions to key supply chains. When people don't have food, you end up in very dangerous circumstances.

TER: Do you see any real potential for precious metals or another currency as a backup?

JW: Well, yes. I think they will become a backup fairly quickly, but we don't have any widely developed black market for another currency at this point because the dollar remains the world's reserve currency. All sorts of things may develop that we don't anticipate. What will be used to cover for the dollar? Gold and silver? The precious metals are limited in supply and not widely held by the population in general. Hard currency from Canada or Australia? That wouldn't be in wide circulation, at least not early on. I think a barter system is where it will go until the currency system is stabilized, but the currency system can't stabilize until the government's fiscal house is in order.

There's no sense in setting up a currency on a gold standard if you can't live within your means, because you'd just end up going through successive devaluations against gold. So whatever's done to set up a new currency system will have to be in general conjunction with the overhaul of the government's fiscal condition. But in the interim, something of a barter system would evolve. Even that, though, is something that may take six months to get stabilized.

TER: It's hard to imagine.

JW: In the Weimar Republic, you could go into a fine restaurant one evening and enjoy its most expensive bottle of wine with a nice dinner. You'd probably negotiate the price before you sat down, because the price would be higher by the time you finished dinner. By the next morning the empty wine bottle would be worth more as scrap glass than it had been worth as an expensive bottle of wine the night before. That's how rapidly things change in a hyperinflation.

But we have a circumstance that did not exist in the Weimar Republic. Our society is heavily dependent on electronic cash. Say you have a credit card with a $10,000 limit. In hyperinflation, that $10,000 might be enough to buy you a loaf of bread.

TER: There's not even enough physical cash running around anywhere in the United States that actually represents what goes back and forth electronically. If you can't use your debit card, how do you pay for your coffee at Starbucks? And how will companies and banks adjust?

JW: You're not going to have electronic payments that are in-barter equivalent that I can foresee. That would be a fairly sophisticated system and the needs are going to be immediate. When hyperinflation starts to break, it can unfold in a matter of weeks, months. You'll need to be able to handle things rapidly. Frankly I think the system will tend to break down. It's not a happy circumstance. How will a small company get its goods to people? There might be blackouts. Who's going to get the fuel to the power plants?

TER: And to the gas stations for the cars for people who still have jobs?

JW: Yup. It will get very difficult. Society won't run as we're used to it. People will find a way, but it's going to take a little while for that to stabilize.

In an electronic society it's going to take some creative thinking by businesses. I'm sure some people will figure out some ways to accommodate these changes, but it's going to be a painful, costly process that won't be conducive to normal revenue flows—at least not as measured in inflation-adjusted dollars.

TER: I'm almost afraid to ask, but how will the stock markets fare when the system breaks down?

JW: Stocks generally tend to reflect inflation, since revenues and profits are in inflated dollars. If you look at stock prices adjusted for inflation, you can have a bear market as well as a bull market. But these are not going to be good economic times. So I think we're going to have a real bad stock market adjusted for inflation. I'd stay out of stocks in the U.S. With the U.S. markets in serious trouble, the rest of the world probably will see lower stock prices as well, but they're not going to have the hyperinflation.

TER: What will plunge us into this abyss? And when?

JW: I think the odds are extremely high that we'll see it break within the next year. I would put it six months to a year, outside. We're getting extraordinary protestations from other central banks about the U.S. finances, its solvency, risk of the dollar. Before the current crisis you never would have heard any central banker making such comments. As this breaks, it's going to be obvious that the U.S. is moving to debase its dollar. It'll have no option to do otherwise. I would fully expect some foreign holders looking to dump the Treasuries. With the dollar plunging, the Treasury won't be able to get the funding that it needs from a practical standpoint in the open markets.

The Fed will come in to salvage that situation, becoming the lender of last resort to the Treasury—literally monetizing the Treasury debt. The Fed might have a couple different ways to address the dollar situation, from raising interest rates to direct intervention, slapping on currency controls. I can't tell you exactly how it's going to go. But you'll have an environment that's effectively creating a perfect storm for the U.S. dollar. I hate to use the term but it's a good one.

Heavy dollar selling will be exceptionally inflationary. Oil prices will spike in response to the weakness in the dollar. Oil is a primary commodity that drives consumer inflation; that's how you can have inflation in a recession. The traditional wisdom is that strong demand against limited supply causes inflation, but you can also have inflation due to commodity price distortions, which is what we had back in '73 and what we've seen over the last year or so.

Most of the recent volatility in the CPI has been due to swings in oil prices, which have been directly tied to swings in the value of the U.S. dollar. About $7 trillion in liquid dollar assets that overhang the market outside the U.S. could be dumped overnight. We're going to be seeing a lot of pressure to accept that back in our system, and it will be very inflationary. The Fed's options will be limited, but again I'd expect them to try and maintain systemic solvency.

So what we end up with is a circumstance where the dollar is under heavy selling pressure. People will feel the squeeze on their inflation-adjusted income with much higher prices for gasoline and fuel oil. The route to the monetary inflation will take hold from the Fed's direct monetization of Treasury debt. As we discussed earlier, the mortgage-backed securities taken off the bank balance sheets have generally gone to excess reserves and are sitting with the Fed. That hasn't been inflationary so far because it hasn't gone into the money supply.

TER: How do we get through this, John?

JW: If there's no solution for the system—and I don't see one; I think it just has to run its course—there still is good news. We as individuals have ways of protecting ourselves, our families, our friends, our businesses—whatever is important to us. To do that we have to preserve the value of our wealth and assets in order to ride out the storm. As terrible as it will be, it will end. A time will come when things become self-righting and the people who have been able to survive will be able to do some extraordinary things.

TER: And what do you advocate in terms of individuals preserving wealth and assets?

JW: Hold some gold, silver, precious metals. I'm talking physical possession. Preferably coins because coins, sovereign coins, are recognized as such. They don't have liquidity issues. Having some assets outside the U.S., and certainly some assets outside the U.S. dollar, is a good thing. I like the Australian dollar, the Canadian dollar, the Swiss franc in particular. They won't suffer the same hyperinflation in Australia, Canada and Switzerland as we do in the U.S., so those currencies will tend to act as ways of preserving wealth. Over time real estate is a traditional store of wealth, but it's not portable and sometimes it's not liquid.

If I'm right about what's going to unfold, a significant shift in government is possible; suppose the government moved so far to the left where maybe private ownership of property was not allowed. Having a lot of assets in real estate under those circumstances might not be so good. I think generally real estate is a good bet but you also have to consider the risks. Use common sense. Think through different things that could happen.

Most importantly, build up a store of supplies, more than you would normally consume over a couple of months, particularly food and water, canned goods. Having those goods can save your life in a number of ways. You'd have food to eat, and if you have extra you can use it to barter. I met a guy who'd been through hyperinflation and found for purposes of the barter system those airline-size bottles of high-quality scotch proved quite valuable. Buy things that you would otherwise consume and rotate your inventory. Don't go out buying all sorts of things you'll never use. Keep what makes sense to you and your circumstances. Make sure you have things that are stable. Not too perishable.

I had a professor at Dartmouth who'd lived for a while in a hyperinflationary environment that devolved into a barter system. He told a story about how his father had traded his shirt for a can of sardines. He decided to eat the sardines, which was a mistake because they had gone bad. But nonetheless that can of sardines had taken on monetary value. So when you look to trade things you want to be careful what you're doing.

TER: How long does a hyperinflation environment typically last?

JW: I guess it depends on how comfortable people can be in the environment. It went on for a couple of years in Zimbabwe, but they were able to function. Here, in a system that can't function well with it, it's not going to last too long. You won't have a usable currency. It's likely a barter system would evolve, and if it became stable and functioned well, it could last for a while. People don't want to starve. If that's a real risk, they will take action to protect themselves. We may have rioting in the streets. The government might declare martial law. If people can live comfortably with hyperinflation it would tend to linger. The more difficult things are, the faster people will move to remedy it.

TER: Well on that note is there anything that we can do as voting citizens to turn this around? Or minimize the impact?

JW: If things break slowly enough that people can see what's coming and respond, tremendous change may result from what comes out of elections. Incumbents are going to have a rough time. The circumstance is open for the development of a major third party that could knock out either the Republicans or the Democrats as a second party. Over time, pocketbook issues tend to dominate elections. If things are going well, if people are prosperous, they ignore the corruption in political circles as being just part of the system. But when they're hurting, they turn out the bastards and look to put in some change. We sure need change. I can tell you that. It's not just one party. Both major parties have an equal share of guilt in what's unfolding. Whichever one is in power keeps making it worse.

…what if history is not cyclical and slow-moving but arhythmic, at times almost stationary, but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night… dramas lie ahead as the nasty fiscal arithmetic of imperial decline drives yet another great power over the edge of chaos.- Niall Ferguson, July 28, 2010

The nasty fiscal arithmetic of imperial decline that Harvard professor Niall Ferguson refers to is America’s unsustainable debt. Growing levels of debt according to Ferguson are now about to drive the US, like other great powers before it, over the edge of chaos; an event Ferguson believes will come sooner rather than later.

…most imperial falls are associated with fiscal crises…empires behave like all complex adaptive systems. They function in apparent equilibrium for some unknowable period. And then, quite abruptly, they collapse.

In 2010 the U.S. government is expected to issue almost as much new debt as all other governments, around the world, combined.

The resemblance between the above chart and the following is obvious - except, of course, to those in denial. [see them side by side here]

The US borrows 45 % of all moneys borrowed by all governments and spends virtually that same percentage of global military spending. Beginning in 1980, President Reagan started the US on the road to financial collapse, borrowing heavily in order to fund the US military buildup, an act of fiscal irresponsibility that would later prove fatal. In his two terms, Reagan increased the US national debt by 258 %, the cost of which would be the loss of America’s economic power-base.

After WWII, both the USSR and the US spent vast amounts of their respective GDPs on military expenditures. Bankrupted, the USSR collapsed in 1992. Three decades later, the US now faces the same fate.

America’s pending bankruptcy reflects America’s shift from the world’s creditor to its largest debtor. Prior to Reagan’s military buildup, the US did not need to borrow to support the global deployment of its military; instead, in order to do so the US spent its entire hoard of gold - 21,775 tons.

The only gold the US now possesses is there because in 1971 the US refused to convert its remaining gold for dollars as required under Bretton-Woods; and by the time Reagan was elected, the US could pay for its global military force only by indebting itself to others

When Reagan took office, total US debt was $980 billion. Today, the budget deficit for this fiscal year alone is projected to be $1.4 trillion. After the Reagan presidency, the US accelerated its spending until sovereign default or currency debasement are its only options.

Sovereign Debt Sovereign Default Sovereign Denial

The Emperor has no clothes, i.e. the empire has no money

The publication of Rogoff and Reinhart’s seminal work on sovereign debt in 2008 predated the sovereign debt crisis by two years; and if Rogoff and Reinhart were not surprised, they would be surprised that it would be industrialized nations that would find themselves under the scrutiny of global debt collectors.

The shift in sovereign debt concerns was accompanied by another extraordinary shift. Between 2000 and 2010, China became America’s creditor as well as its sweatshop; and China knows that the US owes so much money that only by borrowing more can it pay what it owes, a condition economist Hyman Minsky called ponzi-financing, the last stage prior to debtor default.

In truth, the US is not the default virgin described in Rogoff and Reinhart’s study. The US default on its gold obligations was perhaps the most important monetary default in history, plunging the entire world into a regimen of fiat money against its will

Sovereign default, however, is not the only strategy available to the US regarding its unpayable debt. The US could alternatively pay down its massive obligations by debasing its currency, a strategy wherein the US would pay its creditors with increasingly worthless US dollars - to the US, a far more convenient solution.

This is why China is worried - and the rest of the world (including Americans) should be worried too.

Borrow Borrow Borrow Spend Spend SpendNo one will be surprised when the US again tries to borrow its way back to economic growth. This has been the default strategy of the US ever since Ronald Reagan’s Treasury Secretary, Donald Regan said, “Deficits don’t matter”, a financial heresy that would eventually undermine the American economy.

Capitalism is an uneasy balance between credit and debt. However, in the 1980s, far more credit was created and far more debt resulted. Combined with the removal of gold as a constraint on monetary growth, it would be only a matter of time until capitalism’s accrued debt would overwhelm the capacity of credit to contain and service it. That time has now arrived.

Bankers have unleashed a beast they cannot contain. The beast is of their own making although they are careful to deny their patrimony. The bankers’ deflationary black hole of defaulting debt is now destroying capital faster than bankers can create it.

This is why Fed Chairman Ben Bernanke is contemplating flooding the US economy with even more printed dollars, the so-called helicopter drop of money (Milton Friedman’s term), the proscribed solution of Milton Friedman to the Great Depression.

Because Friedman observed that the money supply had contracted during the Great Depression, Friedman erroneously believed sufficient monetary expansion would prevent another depression in the future. This is why Bernanke flooded the US with money and credit in 2009 hoping Friedman was right.

But Friedman was wrong. Bernanke’s palliative was temporary, producing only a short boost instead of a sustained recovery. Despite trillions of dollars spent and interest rates lowered to zero, the US money supply is still contracting - and the US economy is again slowing.

Despite Friedman’s failed theory, Bernanke still believes more injections of credit and debt can do what previous injections didn’t. This is akin to an alcoholic believing more alcohol will dispel the hangover that previous drinks did not. Friedman and Bernanke’s helicopters are coming. Get ready.

Can you hear the helicopters coming Sounds of choppers fill the sky Whirling birds of destruction This is how currencies die

Printing money is easy The problem is the debt Money’s source is credit You ain’t seen nuthin’ yet

Bernanke’s dream is our nightmare His solution is our demise Helicopters filled with money Dropping from the skies

The Golden Hedge Against Chaos

In The Critical Path (St Martin’s Press 1981) Buckminster Fuller predicted the world’s power structures would fall, plunging the world into an unprecedented crisis. Communism collapsed in 1992. Now, capitalism is about to do the same. Bucky’s predicted crisis comes next.

In The Great Wave (Oxford University Press 1996), Professor David Hackett Fisher observed we are at the end of a great wave - a phenomena that separates historical epochs, a phenomena which always end in the complete economic collapse of the existing order. Great Waves last 80 to 120 years. The current wave is 114 years old.

At the 2010 Aspen Ideas Festival last month, Harvard Professor Niall Ferguson warned the collapse of the American empire could be imminent.

I think this is a problem that is going to go live really soon,” Ferguson said. “In that sense, I mean within the next two years. Because the whole thing, fiscally and other ways, is very near the edge of chaos..

When America’s empire does collapse and, like all empires, it will, chaos will reign. Today, the US is the world’s super power, its dollar is the world’s reserve currency. The collapse of the US will change all this and more.

This is why the price of gold has quintupled in only ten years. America’s failing grasp on power has been mirrored by gold’s rise during that same time. In 2000, America’s credit-driven prosperity began to falter with the collapse of the dot.com bubble. Ten years later, America has still not recovered. Indeed, as Niall Ferguson predicts, its demise is imminent.

Since the 1980s, the US has conspired with others to suppress the price of gold as it is an indicator of the failings of the fiat financial system upon which its power is based. This is akin to doctors icing the thermometer to convince others that the patient is not in danger; and while they have been successful in so doing, the patient is now about to expire.

When the US empire implodes, the global geopolitical matrix will collapse as will much of the world’s financial underpinnings. It will be a time of chaos; and gold - history’s hedge against chaos - will again perform its time-honored role.

Responsibility And RenewalIn an extraordinary mea culpa published July 31st in the New York Times, President Reagan's Director of the Office of Management and Budget, David Stockman, a Republican, blamed his own party for four critical errors that contributed to America's decline:

The errors are as follows:

The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. It is.. an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves. Just let the free market set currency exchange rates, he said, and trade deficits will self-correct.[But] relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money and disregard their neighbors…

The second unhappy change in the American economy has been the extraordinary growth of our public debt…This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts…

The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector…the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. They could never have survived, much less thrived, if their deposits had not been government-guaranteed and if they hadn’t been able to obtain virtually free money from the Fed’s discount window to cover their bad bets.

The fourth destructive change has been the hollowing out of the larger American economy…It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1 percent of Americans - paid mainly from the Wall Street casino - received two-thirds of the gain in national income, while the bottom 90 percent - mainly dependent on Main Street’s shrinking economy - got only 12 percent. This growing wealth gap is not the market’s fault. It’s the decaying fruit of bad economic policy. Read here.

Stockman’s mea culpa is an unexpected admission of political responsibility especially at a time when Americans are searching for someone to blame. But there’s no one to blame except America itself. The Russians aren’t responsible, the Muslims aren’t responsible and guess what, illegal immigrants aren’t responsible either - America, and America alone, is responsible for its own demise.

America was born out of the desire for freedom and a better life for all (apologies, however, are due to the Native Americans and the African slaves who suffered in the process). But, along the way, America chose to instead pursue power, not freedom; and, today, the considerable bill for America’s fatal choice is coming due - and more paper money won’t pay it.

The recession and droves of retiring baby boomers will force Social Security to pay out more than it takes in for this year for the first time ever. The tipping point has come six years sooner than was projected in 2009, Treasury Secretary Tim Geithner said Thursday, as he released annual trustees' reports on the fiscal health of Social Security and Medicare. Geithner said Medicare's financal outlook has dramatically improved since the passage of health care reform earlier this year.

Medicare will remain in the black until 2029 under its current structure, mainly because of cost cutting-measures included in the health care legislation, the trustees reported. The program serves 46 million retirees and people with disabilities. Social Security is projected to pay out more than the $41 billion it is expected to take in this year in payroll taxes, the trustees disclosed. Some 53 million Americans collect Social Security, which is projected to run out of money by 2037 unless Congress makes benefit cuts or raises revenue sources to put it back in fiscal balance. Some Republicans questioned the administration's accounting practices and its claim that health care reform will save Medicare money and extend its solvency.

The haves are retirees who were once state or municipal workers. Their seemingly guaranteed and ever-escalating monthly pension benefits are breaking budgets nationwide. The have-nots are taxpayers who don’t have generous pensions. Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of those people will be paying higher taxes or getting fewer state services as their states put more money aside to cover those pension checks. At stake is at least $1 trillion. That’s trillion, with a "t," as in titanic and terrifying.

The figure comes from a study by the Pew Center on the States that came out in February. Pew estimated a $1 trillion gap as of fiscal 2008 between what states had promised workers in the way of retiree pension, health care and other benefits and the money they currently had to pay for it all. And some economists say that Pew is too conservative and the problem is two or three times as large. So a question of extraordinary financial, political, legal and moral complexity emerges, something that every one of us will be taking into town meetings and voting booths for years to come: Given how wrong past pension projections were, who should pay to fill the 13-figure financing gap?

Consider what’s going on in Colorado — and what is likely to unfold in other states and municipalities around the country. Earlier this year, in an act of rare political courage, a bipartisan coalition of state legislators passed a pension overhaul bill. Among other things, the bill reduced the raise that people who are already retired get in their pension checks each year. This sort of thing just isn’t done. States have asked current workers to contribute more, tweaked the formula for future hires or banned them from the pension plan altogether. But this was apparently the first time that state legislators had forced current retirees to share the pain.

Sharing the burden seems to be the obvious solution so we don’t continue to kick the problem into the future. "We have to take this on, if there is any way of bringing fiscal sanity to our children," said former Gov. Richard Lamm of Colorado, a Democrat. "The New Deal is demographically obsolete. You can’t fund the dream of the 1960s on the economy of 2010." But in Colorado, some retirees and those eligible to retire still want to live that dream. So they sued the state to keep all of the annual cost-of-living increases they thought they would be getting in perpetuity.

The state’s case turns, in part, on whether it is an "actuarial necessity" for the Legislature to make a change. To Meredith Williams, executive director of the Public Employees’ Retirement Association, the state’s pension fund, the answer is pretty simple. "If something didn’t change, we would have run out of money in the foreseeable future," he said. "So no one would have been paid anything." Meanwhile, Gary R. Justus, a former teacher who is one of the lead plaintiffs in the case against the state, asks taxpayers in Colorado and elsewhere to consider an ethical question: Why is the state so quick to break its promises?

After all, he and others like him served their neighbors dutifully for decades. And along the way, state employees made big decisions (and built lifelong financial plans) based on retiring with a full pension that was promised to them in a contract that they say has the force of the state and federal constitutions standing behind it. To them it is deferred compensation, and taking it away is akin to not paying a contractor for paving state highways. And actuarial necessity or not, Mr. Justus said he didn’t believe he should be responsible for past pension underfunding and the foolish risks that pension managers made with his money long after he retired in 2003.

The changes the Legislature made don’t seem like much: there’s currently a 2 percent cap in retirees’ cost-of-living adjustment for their pension checks instead of the 3.5 percent raise that many of them received before. But Stephen Pincus, a lawyer for the retirees who have filed suit, estimates that the change will cost pensioners with 30 years of service an average of $165,000 each over the next 20 years. Mr. Justus, 62, who taught math for 29 years in the Denver public schools, says he thinks it could cost him half a million dollars if he lives another 30 years. He also notes that just about all state workers in Colorado do not (and cannot) pay into Social Security, so the pension is all retirees have to live on unless they have other savings.

No one disputes these figures. Instead, they apologize. "All I can say is that I am sorry," said Brandon Shaffer, a Democrat, the president of the Colorado State Senate, who helped lead the bipartisan coalition that pushed through the changes. (He also had to break the news to his mom, a retired teacher.) "I am tremendously sympathetic. But as a steward of the public trust, this is what we had to do to preserve the retirement fund."

Taxpayers, whose payments are also helping to restock Colorado’s pension fund, may not be as sympathetic, though. The average retiree in the fund stopped working at the sprightly age of 58 and deposits a check for $2,883 each month. Many of them also got a 3.5 percent annual raise, no matter what inflation was, until the rules changed this year. Private sector retirees who want their own monthly $2,883 check for life, complete with inflation adjustments, would need an immediate fixed annuity if they don’t have a pension. A 58-year-old male shopping for one from an A-rated insurance company would have to hand over a minimum of $860,000, according to Craig Hemke of Buyapension.com. A woman would need at least $928,000, because of her longer life expectancy.

Who among aspiring retirees has a nest egg that size, let alone people with the same moderate earning history as many state employees? And who wants to pay to top off someone else’s pile of money via increased income taxes or a radical decline in state services? If you find the argument of Colorado’s retirees wanting, let your local legislator know that you don’t want to be responsible for every last dollar necessary to cover pension guarantees gone horribly awry. After all, many government employee unions will be taking contrary positions and doing so rather loudly.

If you work for a state or local government, start saving money outside of the pension plan if you haven’t already, because that plan may not last for as long as you need it. And if you’re a government retiree or getting close to the end of your career? Consider what it means to be a citizen in a community. And what it means to be civil instead of litigious, coming to the table and making a compromise before politicians shove it down your throat and you feel compelled to challenge them to a courthouse brawl. "We have to do what unions call givebacks," said Mr. Lamm, the former Colorado governor. "That’s the only way to sanity. Any other alternative, therein lies dragons."

A report just out from the Center for Policy Analysis, by Courtney Collins and Andrew J. Rettenmaier (solid academic types from Mercer University and Texas A&M respectively), that indicates that state and local pension funds are drastically underfunded.

I first wrote about public pension problems in 2003, suggesting that pensions would soon be underfunded by $2 trillion, as a long-term secular bear market would dampen returns. Turns out that I am once again proven to be a wild-eyed optimist. Quoting from the executive summary:

"Many state and local government pension plans' liabilities are calculated using discount rates that are not commensurate with the risk they may pose to taxpayers. Accounting standards allow pension funds to calculate their liabilities using a discount rate comparable to the expected rate of return on the funds' assets. This typically high discount rate tends to reduce the size of a pension plan's accrued liabilities. However, pensioners have a durable legal claim to receive their benefits and consequently, it is more appropriate to use a lower discount rate in calculating the plans' accrued liabilities.

"Due to the use of high discount rates, the liabilities of state and local government pension plans are underestimated. For example, recent reports by the Pew Center on the States and others indicate that assets will cover about 85 percent of the pension benefits owed to participants. But other studies that adopted lower discount rates have found liabilities may actually be 75 percent to 86 percent higher than reported. As a result, taxpayers' role as insurer may be much greater than anticipated."

Turns out that, by the authors' calculations, state and local pensions are underfunded by $3 trillion (with a T). Of course, some states are much worse off than others. The report has numerous graphs but the following one tells us a lot. It is the unfunded liabilities as a percentage of state GDP.

In the paper (less than 20 pages) they cite the work of Novy-Marx and Rauh and another paper by Biggs. They all use very different methodologies but come up with roughly the same $3 trillion underfunding.

First, understand that in most states the law will not allow for adjustment of pensions. Taxpayers are completely on the hook. That money WILL be found at the expense of either higher taxes or reduced services (such as health care, roads, or police).

Second, the hole is getting deeper each year. Most pensions assume they are going to get an 8% return on their investments. This in a time of a slow economy for years ahead (as I have shown elsewhere), very low bond yields, and a stock market that I think is still in a long-term secular bear market for another 6-7 years, which suggests a continuation of the current sideways, volatile market.

What if instead of getting an 8% return, total returns were 5%? That would mean the hole would be getting deeper by about $75 billion a year. And what if people lived longer, as is clearly the trend, as the actuaries keep changing the longevity tables every few years for the better? (Which for this 60-year old is a very good thing!)

Why use an 8% assumption? Because if you used more conservative numbers, as the academic studies suggest, you would have to make larger current contributions to the pensions, when state and local governments and schools are already in fiscal trouble. So what do the pension plans do? They hire "consultants" who tell them they can expect 8%, as shown by all the nice models and papers that back up their "advice." Note that if you were a consultant who said you should use a 5% discount rate, you would not be hired. Hmmm, where have we seen that phenomenon before?

My friend Paul McCulley (of PIMCO) quipped that the ratings agencies were supplying fake IDs at a teenage drinking party, when it came to the subprime mortgage ratings. The pension consultants are providing a similar service to their clients, who are told what they want to hear, pay large fees for the privilige, and thereby increase the risk to taxpayers and reduce the current pain for politicians.

This is going to end in tears for many states and municipalities. I mean real tears. Pension funding in some states will be required by law to consume 25-30% or more of tax revenues. That is going to mean much higher taxes or reduced services. I would seriously consider checking how your state and locality are funded. You might not want to retire to a place that is on a collision course with serious pain. Just a thought.

Reductions could reach 50 per cent because of plan shortfall depending on negotiations

Canada’s biggest multi-employer pension plan says thousands of members could soon face future benefit cuts of 15 to 50 per cent depending on negotiations with companies. The Canadian Commercial Workers Industry Pension Plan, with 130,000 active members, said in a recent letter to members that companies in Ontario will need to increase their contributions by up to 40 cents an hour per worker by Sept.1 just to maintain current levels for future benefits.

Wayne Hanley, a senior trustee of the plan and president of the United Food and Commercial Workers, also said Thursday that if some employers don’t agree to negotiate adequate contributions in new contracts or in special bargaining, the amount of future benefits could quickly plunge by 50 per cent. "If there is no additional negotiated contributions as of Sept.1, then members of the plan with that employer will go on to a benefit scale that is up to 50 per cent of what they are accruing on a future basis," Hanley said in an interview. He added the situation of continuing funding shortfalls in the plan could lead to labour unrest. "There may be a few strikes over this," Hanley said. "This is an important issue to the members ."

The letter from trustees also disclosed that inactive members who have left a contributing employer but are still eligible for a pension will take a 40-per-cent hit on future benefits next month. However, those inactive members over 50 years of age who would be eligible to draw a pension now won’t be affected by the reductions. The plan, which has assets of more than $1.58 billion, provides benefits to about 20,000 retired union members and their spouses. It also has 130,000 active members working at more than 300 employers and another 150,000 deferred or inactive members. The squeeze on the plan’s finances has not affected the pensions of retirees or accrued benefits of active members.

In the letter, the trustees said a significant recovery in 2009 hasn’t made up for the steep decline in financial markets in the second half of 2008. "Assets have shrunk while liabilities have increased, leaving large unfunded liabilities," the trustees’ letter added. "The CCWIPP, like all others, did not escape the financial crisis which has affected the funding status of the plan considerably." The trustees warned members of a "benefit restructuring" a year ago but would not comment on the possibility of any significant benefit cuts at that time. The plan had already cut future benefits for members by 20 per cent in 2005, In 2008, the plan posted a negative 19.6 per cent return on investment but it turned into a 17.1-per-cent gain last year, which outpaced many other major plans.

The plan has not released an actuarial valuation for 2009. But at the end of 2008, actuarial liabilities topped assets by $759.3 million on a "going concern" basis, which underscored the plan’s difficulties. Trustees representing the union have pushed employers to jack up their contributions to bolster the plan for more than a year. Hanley said some companies such as the Metro Inc. grocery store chain have "stepped up" in bargaining to make the adequate hourly contributions to maintain future benefit levels. But he said it is a major issue in current bargaining for a new contract covering thousands of workers at Loblaw Cos.

Greg Hurst, a prominent Vancouver-based pension consultant, said active plan members not close to retirement should be "very concerned" if their company closes and they become a deferred or inactive member and a potential victim of a 40-per- cent cut. "The impact of a decision or circumstance (which may not be in the individual’s control) that results in termination from the plan prior to retirement is draconian and extraordinary," Hurst said. "If I were a member, I would make my concerns known to the Financial Services Commission of Ontario and my local MPP."

A court fined nine trustees of the plan including Hanley and founder Cliff Evans a total of $202,500 earlier this year for spending too much of the fund’s money on questionable investments in Caribbean hotels and resorts.

The labour market’s stunning rebound of recent months ground to a halt in July, as the economy lost a net 9,300 jobs and the unemployment rate edged back up to 8 per cent, according to data released from Statistics Canada on Friday.The unexpected drop marks the first decline in employment this year and comes after a near-record increase of more than 93,000 jobs in the previous month. The jobless rate rose unexpectedly from 7.9 per cent in June, when it had fallen below 8 per cent for the first time since early 2009.

In July, employers slashed 139,000 full-time positions while adding almost 130,000 part-time jobs. The full-time losses included drops of more than 65,000 jobs in education services as many teachers, administrators and custodial staff shifted to part-time status at the end of the school year, and about 30,000 in finance, insurance, real estate and leasing, in part because the housing market is cooling across the country. Since July of 2009 though, Canada’s recovery from the recession has included the creation of 393,700 positions, Statscan said Friday, meaning that even with the drop last month the economy has still recouped most of the jobs lost during the slump. Indeed, manufacturing, one of the hardest-hit industries when exports to the U.S. plunged in late 2008, saw a monthly gain of about 29,000 jobs - the biggest increase in two years.

The surprise dip in employment pushed the Canadian dollar down for the first time in three days because it boosts the likelihood that the Bank of Canada will pause its tightening cycle after one or two more interest-rate hikes. Equally important to the trajectory of the economy and the central bank’s rate path, the U.S. Labour Department reported Friday that American private employers added 71,000 jobs in July, fewer than expected and not enough to cut into the 9.5-per-cent unemployment rate as the U.S. Census Bureau laid off tens of thousands of temporary workers.

Economists took the tepid Canadian reading in stride, saying it was in the works after June’s gain and an unprecedented increase of about 109,000 two months earlier, and dismissing the notion that the drop may be the start of a new trend. "The first drop in employment since December does not signal a fundamental shift in the economy,’’ said Doug Porter, deputy chief economist at BMO Nesbitt Burns in Toronto. "The main driver of the weakness was the heavy-duty decline in education jobs, which looks highly suspect - look for a recovery on this front in the months ahead. Overall, this report appears to be a very mild payback for previously amazing strength, and the bigger picture is that almost all of the recession’s job losses have been reversed in the very short space of a year.’’

That’s in stark contrast to the U.S. labour market, which will be very slow to recover the 8.4 million jobs lost during that country’s worst downturn since the Depression as companies remain skittish about hiring. Still, economic growth from April to June slowed to almost half the pace of the previous quarter, the Bank of Canada said in a quarterly forecast last month, kicking off four consecutive quarters in which austerity measures in Europe and a fragile U.S. rebound will contribute to a slower domestic recovery than the central bank had expected. Governor Mark Carney and his deputies say Canada’s growth at an annual rate slowed to 3 per cent in the second quarter, after a 6.1-per-cent pace in the first three months of the year, and that growth will come in at a 2.8-per-cent pace in the current quarter and 3.2 per cent between October and December.

Canada’s bounce-back from the global downturn has been the envy of the Group of Seven club of advanced economies, and Mr. Carney has already raised interest rates twice starting in early June. His next decision is scheduled for Sept. 8. Even as the U.S. economy seems at risk of a dreaded "double-dip’’ back into recession, which could be disastrous for Canadian exporters, the July report from StatsCan indicated that some inflationary pressures could be building on this side of the border. Average hourly wages rose 2.2 per cent in July from the same month a year earlier, compared with a 1.7-per-cent pace in June.

The Government must win the "hearts and minds" of public sector staff to gain their trust ahead of swingeing cuts or face mass strike action in a winter of discontent, an employers' group has warned. Whitehall has been urged to bolster employee consultation and communication during the toughest cutbacks in decades, or risk staff siding with trade unions to cause mass disruption to services, according to the Chartered Institute of Personnel and Development. The CIPD's employee engagement survey published last month found just 16pc of public sector staff trust their senior leaders. Job satisfaction has also plummeted to a record low.

Mike Emmott, employee relations adviser, said the Government had to bolster managers' leadership skills, provide meaningful consultation opportunities for staff and more effective communication to help employees understand the changes. He said: "Trade unions have the power to disrupt only if employees trust them more than they trust management. The fundamental need is not to 'manage the trade unions', it is to manage the employment relationship and communicate the case for change."

However, in a new paper published today, the CIPD said it was "incumbent" for the Government to consider its options for reducing the risk of disruptive and damaging industrial action by public sector staff, such as banning strike action of those involved in the delivery of essential services. More than 40pc of employees are in favour of such a ban, according to the CIPD survey. But Mr Emmott warned: "If the Government was forced to go down this route it would be a sign of its failure to make the case for change to public sector employees." He urged the Government to try to steer consensus among employees rather than just assume they would strike. "Unions, government, front line workers and the public alike have far more to gain from a strategy focused on building trust and avoiding conflict," he said.

Earlier this week it emerged Leeds City Council had written to staff asking them to find different ways to cut £19m, in an attempt to minimise job losses. Bosses have already received hundreds of responses suggesting ideas – including putting an end to shelling out £50 every time a light bulb needed changing. A Leeds spokesman said the move was designed to foster open and honest communication for staff and to involve them in difficult decisions. "We're one of the first councils to have done this," he said. In contrast, neighbouring council Kirklees said it would cut 1,500 jobs by March next year in response to budget cuts, which has already seen workers threaten industrial action.

Goldman Sachs Group Inc. told the Financial Crisis Inquiry Commission that 25% to 35% of its revenue comes from derivatives-based businesses, according to a person familiar with the situation. The figures are part of Goldman's response to a request by the panel to disclose information about its derivatives holdings and operations. Derivatives have been blamed for exacerbating the credit crisis, and Goldman has faced scrutiny from the FCIC for its derivative contracts with American International Group Inc., the insurer bailed out by the U.S. government.

A memo sent to the panel Thursday night by the New York company included an analysis of derivatives-based revenue at Goldman from 2006 through 2009, said the person familiar with the matter. Based on the percentages provided by Goldman, such businesses generated $11.3 billion to $15.9 billion of the company's $45.17 billion in net revenue for 2009.

An FCIC spokesman wouldn't immediately confirm that the panel has received the information from Goldman or any other firm. "We've asked for the same information from several banks," the spokesman said. "They have all indicated they are working hard to provide that information to us. If we need additional information, we will ask for it." The 10-person commission is required by Dec. 15 to issue a report on the causes of the financial crisis.

Goldman's analysis reflects all derivatives products, ranging from credit to equity to interest rates, traded on and off exchanges, said the person familiar with the situation. Goldman said it doesn't conduct its businesses in a way that delineates revenue from derivatives transactions or other types of trading, this person said. For example, Goldman cited credit-trading desks that are separated by industry group, adding that traders are indifferent to whether they are selling clients a bond or a credit derivative. As a result, separating the revenue among the two product lines is useless, Goldman told the FCIC. The firm also said its technology systems firm-wide don't single out derivatives transactions.

The analysis was based on a "best guess" of the main type of trading on each Goldman trading desk at the firm, said the person familiar with the matter. The numbers vary widely, with the company's fixed-income unit getting much more of its revenue from derivatives than investment banking, where no revenue is tied to derivatives.

Another item from Dow Jones, this one offering a few thoughts by Allen Mattich on the subject of whether the stock market or the bond market is correctly forecasting the future.

One thing is certain, they both can’t be right and, at some point in the not-too-distant future, stocks and bonds will stop rising together. What would really stump market analysts is if they both started falling together… Oh Dear… Maybe I shouldn’t have brought that up…

Russian premier Vladimir Putin has ordered a halt to all exports of wheat and other grains from August 15, raising the stakes dramatically in the crisis over wheat supplies. "This is very serious," said Abdolreza Abbassanian, chief grain economist at the UN Food and Agriculture Organization. "It's a desperate situation because it has caught everybody off guard. We're not facing the situation of two years ago but there is a risk of destabilising panic."

The shortage may trigger a bout of "agflation", posing a quandary for central banks. Professor Charles Goodhart from the London School of Economics fears that rising food prices will add 0.5pc to Britain's sticky inflation, already testing market tolerance. Wheat prices surged by their maximum daily limit of 60 cents to $7.86 a bushel on Chicago's exchange, with knock-on effects across the nexus of tradable grains. Mr Putin said it was a temporary ban on wheat, corn, barley, rye, and grain products until the end of the year due to "abnormally high temperatures", adding that Russia needs to cap domestic food prices and build its own reserves.

Wheat has surged 69pc since June, but is still far below it $13 peak in 2008. The spike guarantees a sharp rise in bread prices this Autumn. Premier Foods said a loaf of bread may go up to 10p. Mr Putin pressured Kazhakstan and Belarus to impose similar curbs as the worst drought in a century threatens to drag into late August. "It is unprecedented to ask neighbouring countries to do the same," said Mr Abbassanian. Ukraine insists that exports are safe, but analysts fear it may follow suit. The Black Sea belt and Eurasia's Steppes produce a quarter of global wheat exports. The saving grace is that stocks are 187m tonnes, against 124m in 2008.

Corn futures rose 5.8pc, oats rose 4pc, and rice rose 2.8pc on the news. "Food markets are linked. This is going to put further strains on corn. Animal feed prices will go up, affecting meat," said Mr Abbassanian. Commodity spikes can be inflationary but also deflationary, depending on context. Central banks in Europe and the US misjudged events two years ago, mistaking oil and food rises for the start of a 1970s price spiral. In fact, it drained demand from economies already tipping into recession.

"This is more deflationary than it looks," said Albert Edwards from Societe Generale. "The risk is that central banks will hold off from further easing that I think is needed, increasing the risk of a hard-landing." Mr Putin acted after meteorological experts issued further drought warnings, raising fears that the ground would be too hard to seed the winter crop next month. The loss of both crops would force Russia to withdraw from export markets for two years. Rabobank expects Russia's wheat output this year to fall from 58m to 45m tonnes.

Kirill Podolsky, head of Russia's grain group Valars, told Bloomberg that the ban had created havoc. "We have ships lined up for grain and no idea what to do. This will be a catastrophe for farmers and exporters alike," he said. The move will be welcomed by grain firms that fixed supply contracts in advance, and are now caught short. Some may declare "force majeure", suspending contracts for reasons beyond their control. The FAO said low-income countries such as Egypt or Pakistan that depend on imports will be worst hit. The concern is that some countries will take emergency action to secure vital supplies.

Wheat headed for the biggest weekly gain in half a century on concern other countries may follow an export ban by Russia, and may reach $10 a bushel, a price not seen since the global food crisis in 2008. Russian Prime Minister Vladimir Putin said Kazakhstan and Belarus should also suspend shipments as Russia announced a ban on grain exports from Aug. 15 to yearend. "It’s got $10 written all over it," said Peter McGuire, managing director at CWA Global Markets Pty, who on Aug. 3 correctly forecast the surge to $8.50. Wheat was last at $10 in March 2008, and a gain to that price would be up 23 percent from yesterday’s close.

Russia’s ban may benefit rival producers, including the U.S., the largest exporter, Australia and Argentina, according to Rabobank. Wheat prices have doubled in less than two months as drought slashed the harvest in Russia, the third-largest grower, and rains cut Canadian output. The surge may herald a new food crisis as corn and other staples jump, said a trade group from Indonesia, Asia’s top wheat buyer. "This situation is reminiscent of the irrational moves already seen in the past, for example at the start of 2008," Bourges, France-based farm adviser Offre et Demande Agricole said in a comment today. "It’s always very hard to say where prices can end up in such conditions."

Best PerformerWheat for December delivery rose 1.2 percent to $8.25 a bushel on the Chicago Board of Trade at 2:14 p.m. Paris time, taking gains for that contract to 25 percent this week. That’s the most since at least 1959. Wheat is the best-performing commodity this year on the UBS Bloomberg CMCI Index, ahead of coffee and nickel. "We believe that the rally in wheat prices is overdone, but would not short wheat," Morgan Stanley analysts including Hussein Allidina said in a note to investors, referring to making bets that prices may drop. Other wheat-growing countries may opt to limit exports, potentially boosting prices, even though global wheat stockpiles are ample, they wrote.

Milling wheat for November delivery traded on NYSE Liffe in Paris rose 1 euro, or 0.5 percent, to 224.50 euros ($295.91) a metric ton. Investors bought and sold a record 74,729 contracts yesterday, the exchange said today. Wheat has rallied as a heat wave in Russia, dry weather in Kazakhstan, Ukraine and the European Union, and flooding in Canada hurt crops. Some Russian farmers are reluctant to sow winter grains after soil became too dry because of the drought, the government said today.

Food RiotsWheat reached a record $13.495 in February 2008, part of a surge in prices that sparked food riots from Haiti to Egypt. Still, concern that lower-than-expected wheat output may contribute to a food crisis is "unwarranted at this stage," the UN’s Food and Agriculture Organization said on Aug. 4. There should be sufficient global supplies of wheat, "barring no more production setbacks," said Doug Whitehead, an analyst at Rabobank in London. "The market will pay very close attention to crop prospects in Australia and Argentina."

Halting Russia’s wheat shipments would be "appropriate" to contain domestic prices that jumped 19 percent last week, Putin said. The country exported 17.4 million tons of wheat in the year through June, the Federal Customs Service of Russia said today. The Russian ban will "rattle the markets for the next several months" and boost demand for stockpiles from the U.S., Bob Young, the chief economist at the American Farm Bureau Federation, said yesterday from Washington.

‘Driving Lamborghinis’"When Putin speaks, the world listens," said McGuire at CWA, referring to the possibility other nations may curb shipments. U.S. farmers would benefit because they have the supply to meet demand in the global market, he said. "They’ll all be driving Lamborghinis." Kazakhstan, Russia’s partner in a customs union, exported 7.5 million tons in the year ended June 30, while Belarus, also a partner, shipped 400,000 tons, according to the U.S. Department of Agriculture. Ukraine accounted for 9.2 million tons in the same year, it said.

World wheat stockpiles may fall 2.5 percent to 192 million tons by June as the dry weather hurts the outlook for crops in Russia, Kazakhstan, Ukraine and the EU, the International Grains Council said on July 29, reversing a forecast for higher inventories. Corn for December delivery fell 0.7 percent in Chicago to $4.1525 a bushel while soybeans for delivery in November were unchanged at $10.29 a bushel.

"We have had almost no rain for three months," says Vladimir Kochetkov, a manager at one of the biggest state-owned farms in Nizhny Novgorod, in the heart of European Russia. "There has not been such a long drought here for more than one hundred years," he adds, with an air of resignation. The grain crop at the 8,000 hectares of farmland he manages has been halved by the lack of rain.

He is not alone in facing a ruined crop. In the area around Nizhny Novgorod, about 400km east of Moscow, officials fear the grain harvest will drop to 600,000 tonnes, less than half last year’s 1.4m. "It’s a disaster," says Alexander Efremtsev, at the Nizhny Novgorod Grain Union. Hot summers are not unusual in Russia’s grain belt, which stretches from the Black Sea to Siberia and enjoys some of the world’s most fertile soil. This year, a severe heat wave and drought have destroyed the country’s grain crop, pushing farmers to the brink of bankruptcy and exposing the fragility of world food supplies. Prices of everyday food staples including bread are likely to jump as a result.

Global wheat prices soared this week on news of the deteriorating Russian harvest. European milling wheat has surged 80 per cent in the last six weeks alone, stirring memories of the 2007-08 food crisis. The acute shortage of supplies and fears of even steeper rises in wheat and food prices spurred the Kremlin on Thursday to announce an export ban on grains until the end of the year. The ban, which surprised traders and food companies, set wheat markets on fire. In Chicago, US wheat hit an intraday high of $8.41 a bushel on Friday, up more than 25 per cent on the week and, excluding the 2007-08 food crisis, a record high.

The prices of other crops, from corn and soyabean to rapeseed and barley, used to make beer, have also jumped sharply. This wider rally reflects not just the direct impact of the drought on these commodities, but the risk that lower supplies of wheat, which is also used to feed livestock, will lead to higher demand for alternative animal feed such as corn. The panic buying comes as traders predict Russia’s exports will drop to just 3m tonnes – the total shipments that left the country before the export ban – far below the 18m tonnes it sold overseas last year, worth $2.7bn, after a bumper crop.

Luke Chandler, grains analysts at Rabobank in London, says the sudden shortfall in global supplies coincides with Russia’s rise to prominence as an important exporter, particularly for North Africa and Middle East countries, which, he says, are "becoming increasingly reliant on Russia". Importing countries and food companies will now have to rely on wheat from the European Union, the US, Australia and Argentina. Traders and analysts say there are enough stocks to bridge the gap left by Russia, but no safety cushion. In other words, the weather between now and the harvest in Australia in December needs to be perfect.

The long-term consequences of the drought and the export ban remain unclear. Analysts, though, point out that the Black Sea region is well known for its volatile grain production. It was a drought in the same area that triggered sweeping grain purchases by the Soviet Union in 1972, an episode that became known as the "Great Grain Robbery". Moscow corralled all exportable supplies for the US. This year’s crop failure marks a major setback for the Kremlin, which is carving a role for Russia as a global grain power. Dmitry Medvedev, Russian president, has set a goal to double its grain exports by 2020 and challenge US supremacy. The US exports half the world’s corn, a third of its soyabeans and a fifth of all wheat, making America the powerhouse of agricultural markets.

Agriculture is one of four industries being prioritised by the Kremlin as it tries to overturn the disastrous legacy of Stalin’s collectivisation. A decade ago Russia depended on US wheat imports to feed itself, but government reforms, including a law allowing foreigners to buy land, have boosted interest in farming. Grain harvests have risen steadily since 2000, driven by more generous state subsidies and growing Russian and foreign investment in farming and food processing. There is room for more – Russia is one of the only countries in the world with the potential to increase sharply grain production. According to the World Bank, the country could double its annual harvests if farming methods were modernised and idle land put to use.

Analysts and farming executives say the crisis is likely to accelerate the consolidation of Russian agriculture already under way, allowing big conglomerates to swoop on struggling small farmers. Black Earth Farming, an international company farming in Russia, says its winter harvest is down 44 per cent but that it will keep investing. "We are here for the long term. This is a tough year but it will not scare us off," says Gustav Wetterling, its head of investor relations.

Dmitry Rylko, the director of the Moscow-based Institute for Agricultural Market Studies, says the failed harvest, while creating "tremendous difficulties", is unlikely to lead to an exodus of investors. "Russia is extremely promising for agriculture," he says. "We have been lucky with the harvest for almost ten years. Crop failures happen everywhere from Argentina to Brazil and Ukraine."

The price of America's daily bread and meat could soar this fall, as surging wheat prices in anticipation of a Russian ban on exports stoked fears about tight supplies. Grain shortages and food price hikes in 2007 and 2008 sparked riots worldwide, but agriculture analysts said the U.S. wheat crop has been strong, and that stockpiles of wheat and other grains worldwide are greater now than they were three years ago.

According to media reports, U.S. farmers have rushed to put out millions of bushels of wheat to bolster worldwide inventories. Wheat prices on Friday dropped by 60 cents on the Chicago Board of Trade, voiding Thursday's price run-up. Yet analysts warned that consumers might be hit with higher prices at the grocery store in the months ahead because of a convergence of factors. With the memory of the previous food crisis still fresh, some countries and consumers may resort to hoarding, which could push prices upward. Speculators and some food companies might seek to exploit public worries.

"The situation is still in flux," said Phil Flynn, a commodities analyst at PFG Best in Chicago. "It is far too soon to say that this is over." The price of wheat surged to a two-year high when Russian Prime Minister Vladimir Putin announced the ban Thursday. Wildfires and serious droughts have ravaged a large swath of central Russia this summer, destroying one-fifth of its crop. Russia is one of the world's largest wheat exporters. The Ukraine government, also a large global wheat supplier, reportedly canceled a number of its contracts because of similar dry-weather issues.

Russian officials quickly backpedaled from their earlier firm stance that the export ban would begin Aug. 15 and last through the end of the year. On Friday, Igor Shuvalov, Russia's first deputy prime minister, said the government would honor current contracts and might revisit the ban later this year. The country, according to media reports, is considering whether to delay the ban until Sept. 1, to let at least 700,000 tons of grain shipments already en route to leave the country.

Government officials acknowledged that it was still unclear whether the drought would stretch into the fall, when farmers would be gearing up to plant next year's crop. Shuvalov also said that the government didn't know how much grain it would ultimately be able to harvest in the fall.

The housing bust has made owning a home a lot more affordable -- but in some places, prices are extraordinary; you can buy a nice condo for less than the cost of a new family car. Some cities have dozens of attractive condominium listings selling for $50,000 or $25,000. There are some selling for less than a new Toyota Corolla. And these are not derelict hovels in crime-ridden communities: These homes are often in move-in condition and located in nice neighborhoods.

"Not to sound like a salesman, but there are some real bargains out there," said Kevin Berman, a broker with Bankers Realty Services in Fort Lauderdale, Fla. The housing bust has taken down the national median home price by about 23% since 2007, according to the National Association of Realtors (NAR). But condo have fallen even further, down about 25%. In Sacramento, Calif., condo prices have fallen 59% from what they averaged in 2007, according to NAR. Miami condo prices have plunged 65%, and in Las Vegas they are off 66%.

Prices of individual units are down even more. One condo in Deerfield Beach, Fla., that sold for $115,000 five years ago now lists for $25,000. That's a drop of nearly 80%. Much of these price drops can be attributed to over development during the boom. Much of that came in Sand State markets such as Las Vegas Miami and Phoenix, where prices for all properties are have fallen precipitously.

Berman has a one bedroom condo in one of these areas with a listing price of $15,000. He said it needs a little work, and it's in a community that doesn't allow you to rent out the property,, but still, $15,000? "It's great for a vacation property or a retirement home," he said. Another of his listings is in North Miami, about three miles from the beach. It's a 900-square foot, one-bedroom, one-and-a-half bath with a community swimming pool, central air and assigned parking that costs just $23,450. That's less than a fully loaded new Camry.

In Las Vegas, there are more than 200 condos listed for $30,000 or less. A two-bedroom, two-bath condo with a covered patio in North Las Vegas can be had for just $30,000. Of course, condo owners have other expenses, particularly maintaining the grounds and common areas, but these tend to be quite low. And the property taxes are also often modest. Plus, if these housing markets ever rebound, there's even likely to be some price appreciation for these homes. You can't say that about a new car.

Mortgage rates fell in the past week to the latest in a series of record lows amid concerns about the state of the economy, according to a survey released on Thursday by Freddie Mac. Rock-bottom rates offer a glimmer of hope for a housing market struggling to gain traction since the recent expiration of popular home-buyer tax credits. Interest rates on 30-year fixed-rate mortgages, the most widely used loan, averaged 4.49 percent for the week to August 5, down from 4.54 percent a week earlier and 5.22 percent a year ago, according to the survey. Thirty-year rates have fallen to fresh lows in six out of the last seven weeks. Freddie Mac, the second-largest U.S. mortgage finance company, started the survey in April 1971.

Fifteen-year fixed-rate mortgages averaged 3.95 percent, down from 4.00 percent last week, the lowest since Freddie Mac began surveying this loan type in 1991. Fifteen-year rates have hit fresh lows in five of the last seven weeks. With rates near their lowest since Freddie Mac started the survey, demand for loans to refinance or purchase homes has picked up, boding well for the market and the economy. "Yet again, interest rates for fixed-rate mortgages and now the hybrid 5-year ARM (adjustable-rate mortgage) fell to ... record lows this week following the second-quarter GDP release," Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement.

Annual revisions cut cumulative growth in U.S. gross domestic product over the past three years to 0.6 percent from 1.4 percent, reducing inflationary pressures and allowing longer-term rates room to ease, he said. Mortgage rates are linked to yields on both U.S. Treasuries and mortgage-backed securities. Home sales have fallen since the expiration of government tax credits. To take advantage of them, buyers had to sign purchase contracts by April 30. Contracts originally had to close by June 30 but that was extended by three months.

Cameron Findlay, chief economist at LendingTree.com in Charlotte, North Carolina, said the housing market is vulnerable, with a flood of foreclosures in the pipeline and high unemployment weighing heavily. "The world essentially collapsed after the tax credits expired," he said. "This baby cannot walk on its own without government intervention." Findlay said his biggest concern is that the economy is going to stall and believes there is a 30 percent chance of a double-dip recession. "Low mortgage rates are certainly a positive, but jobs growth is more important and without that, a housing rebound will not emerge," he said.

The U.S. Labor Department said on Thursday new claims for unemployment benefits rose last week to the highest since early April. On Friday it will release July U.S. payrolls data. The Mortgage Bankers Association said on Wednesday U.S. mortgage applications to purchase homes rose last week for a third straight week as rates tumbled. Freddie Mac said the rate on the 5/1 ARM, set at a fixed rate for five years and adjustable each following year, was 3.63 percent, down from 3.76 percent last week, its lowest level since Freddie Mac began tracking this loan type in 2005. One-year ARMs were 3.55 percent, down from 3.64 last week. A year ago, 15-year mortgages averaged 4.63 percent, the one-year ARM was 4.78 percent and the 5/1 ARM 4.73 percent.

Small businesses report losing an estimated $2 trillion in lost profits and asset valuation since the recession started in December 2007, according to a new study released by Barlow Research. That works out to an average loss of $253,000 for each of the eight million U.S. businesses with sales between $100,000 and $10 million. Larger companies have been less affected and are recovering more quickly according to the survey, which was fielded in July 2010. After showing guarded optimism in the first half of the year, pessimism has returned for an increasing number of small business owners. Only 35% indicated their financial condition was improving, down from 46% in the second quarter.

When asked to estimate the chances that their company will survive the next year, 14% are less than 50% confident they will still be in business by August 2011. "One in seven small business owners are estimating their chance of survival by the flip of a coin," said Bernie Kuechler, the Barlow Research Analyst who authored the study. The study reveals that few small businesses believe the recession has ended. Fifty-six percent of small businesses expect the recession to last beyond 2011. Less than one in ten businesses believe the recession is over.

"We should not expect significant job creation in the near term from this segment," according to Kuechler. More small businesses are reporting intentions to decrease than those planning to increase full-time employees, with the most planning to stay the course. The study does forecast job creation from companies with sales greater than $10 million, where optimism and growth in sales is improving.

It is summer time, but the livin’ feels far from easy on Wall Street. In recent weeks, the main equity indices have been trending higher, helped by good US earnings and the European stress tests. But while the S&P 500, say, rose about 7 per cent last month, the mood is anything but euphoric. As my colleagues Francesco Guerrerra and Michael Mackenzie reported this week, one striking feature of this summer is that trading volumes in many asset classes have tumbled.

This is partly because many institutional investors have quietly gone on strike, choosing to sit on their cash rather than trade. But something curious is happening in the retail world too. In recent months, US retail investors have continued to put money into government and investment grade bond funds. More recently, there have also been some flows into junk bond funds. But in the equity world – which is perhaps the most visible cornerstone of American finance – retail investors are also on strike. Last week there were $1.5bn outflows from US equity mutual funds, after $3.2bn and $4.2bn of outflows in each of the previous two weeks. Indeed, in the past 12 weeks – or since May – there have been continuous outflows of more than $40bn.

So what on earth is going on? Optimists like to blame it on a summer lull, or temporary jitters about US unemployment or the eurozone. They may be right. But personally, I suspect that there is something more fundamental going on too. The most pernicious issue hanging over the system right now is a loss of confidence – not merely in the idea that the future will be a brighter place, but also, most crucially, about whether anybody is able to predict that future at all.

Think back, for a moment, to the halcyon years before the summer of 2007. Back then, it seemed to be such a cosy and stable economic era that economists dubbed it "the Great Moderation" and most investors and businesses had absolutely no qualms about making 10-year plans. Indeed, that was expected in a world, where long-term planning – armed with complex computer forecasts – appeared to be not just rational, but a hallmark of modern society, something that separated us from earlier ages.

However, the financial crisis has shattered that sense of complacency. And while the immediate panic that erupted in the autumn of 2008 has now ebbed away, in its wake it has left a loss of trust – and innocence. These days, investors and businesses know that the world can sometimes be a profoundly unpredictable and uncontrollable place. No longer does it seem wise for corporate boards (or investors) to make 10-year plans, instead, time horizons have shrunk and many businesses and financial players have developed a mentality more akin to third-world peasants, who create strategies – but do so with bated breath, constantly braced for fresh storms.

And in practical terms, there are a myriad of uncertainties – or potential storms – out there now. The political trajectory in the US, for example, seems pretty volatile, given the rise of populist rhetoric. The government is intervening in the economy in unpredictable ways and financial reform could potentially change capital flows significantly. New jitters are afoot about a double-dip recession and deflation too. And just to make matters worse, the memory of the May 6 "flash crash" haunts the markets. In the past three months, US regulators and bankers have scurried around trying to work out what caused equity prices to gyrate so wildly that day. But, thus far, they have not offered any convincing explanation.

That is shocking and profoundly debilitating. After all, it is bad for investors to feel confused about the outlook for government regulation or deflation; but it seems that nobody really understands how the basic mechanics of the equity market work any more, it is hard to trust that the stock markets are a good destination for your money. Little wonder, then, that those US equity mutual fund outflows have accelerated.

Of course, as I said above, all this may yet turn out to be just a temporary phenomenon. If, say, the outlook for financial regulation becomes clearer or the economy rebounds, animal spirits may yet return. But the history of Japan shows that this does not always occur – a full two decades after its bubble-and-bust, most retail investors (and even some institutional investors) remain terrified of putting their money into stocks, due to a corrosive loss of trust. The US is nowhere near that point yet. But policy makers and bankers alike had better keep watching those trading numbers. And cross their fingers that there will not be another "flash crash" any time soon.

Mohamed El-Erian, the head the world's largest bond fund, has said the United States faces a one in four chance of suffering deflation and a double-dip recession. "I do not think the deflation and double-dip is the baseline scenario, but I think it’s the risk scenario," Mr El-Erian, chief executive officer at Pacific Investment Management Co. (Pimco), told reporters in Tokyo on Thursday. "If you wonder how meaningful 25pc is, ask yourself the following question: if I offered you that I would drive you back to work, but there's a one in four chance that I get into a big accident, would you come with me?"

Mr El-Erian, who helps manage more than $1 trillion in assets, warned that action needed be taken quickly to prevent a economic slowdown. Mr El-Erian said that downward pressure on prices – translating into a rise in real borrowing costs – was already encouraging companies to accumulate cash "in a way that was unthinkable just two years ago", while individuals were being driven to save. "On the road to deflation, which is what the United States is on today ... policy becomes less effective," he said. He also warned that US unemployment was likely to stay "unusually high".

US inflation is currently at it lowest rate in 44 years. Consumer prices dropped 0.1pc month-on-month in June, following a fall of 0.2pc in May. The core consumer price index, which excludes volatile energy and food prices, increased 0.2pc in June, but is well below the 2pc growth targeted by the Federal Reserve. Concerns over deflation has already led some major investment funds to hedge against stock falls while buying more interest-bearing assets.

The rush to safety saw two-year US Treasury yields fall to a record low of 0.51pc on Tuesday. The 10-year Treasury yield dropped to a 15-month low of 2.85pc in July. Bill Gross, manager of Pimco's record $239bn Total Return Fund, raised holdings of US government-related debt to the highest level in eight months in June, according to the company’s website.

For people searching for signs of life in the stagnant economies of Europe and the US, results from the world's consumer goods giants Procter & Gamble and Unilever won't have made happy reading. Paul Polman, Unilever's chief executive, says anyone counting on consumers to spend those markets out of their torpor will have a long wait – it could be five years before any significant growth returns. Mr Polman does not regard himself as a pessimist, but a "realistic optimist". And with more than 50pc of the company's revenue in emerging markets, where sales volumes grew at 10pc and above in the first half of 2011, he has plenty of reasons to be cheerful. Unilever's emerging markets of Asia, Africa and Latin America have become "decoupled" from the developed economies, he said.

It's the same picture painted by Reckitt Benckiser, the maker of Dettol and Vanish, and Procter & Gamble (P&G) which is aggressively chasing growth in Asia as American shoppers turn to supermarket own-label products. For companies of their size, the fast-growing emerging economies offer a growth engine. But for politicians on both sides of the Atlantic struggling to withdraw fiscal stimulus and cut debt, without sending the economy into another downturn, the indicators from the consumer sector are that the situation at home remains very fragile.

Companies like Unilever, P&G and Reckitt pride themselves on knowing what you, the consumer, wants before you know yourself. But the most recent results show the siege mentality of the recession has not lifted – we want to pay as little as possible for exactly what we need. The era of continual consumption, which drove the US and UK economies in the last decade, will not be staging a comeback any time soon. "I cannot see that Europe and the US will show significant growth for five years at least," Mr Polman said after Unilever announced first-half results yesterday. "Our business is driven by employment levels and consumer confidence. In Europe it will be difficult to move unemployment from 10pc."

However, he did make clear the situation was "nothing to panic about" from the company's point of view, with Unilever focused on taking share from its rivals with innovative new shampoos, deodorants and washing powder, and improving profitability. Promotions and discounts have been the lifeblood of the branded food and household products makers for the past 18 months. Along with the retailers, they have offered two-for-ones and 20pc extra free to keep cash-strapped customers loyal. Premier Foods, the maker of Hovis and Branston pickle, said the same trend prevails in branded food.

"Six months ago we were seeing 4pc growth in our markets in Europe, now it is below 1pc... In Europe there is now virtually no market growth," said Bart Becht, chief executive of Reckitt, when the company reported second-quarter results last month. "We have not lost market share. The key driver of the fall was extra promotional spend to maintain market share, coupled with economic problems." Mr Polman said Unilever has also invested in promotions, and that is unlikely to change soon. "We have spent time in Europe making sure that our brands are cost-competitive," he said, but insisted it is not a straightforward case of belt-tightening in Europe. Sales of cheaper supermarket own-label goods have not increased in the sectors where Unilever competes.

In the US there has been more of a shift away from the big brands, but the own-label share was lower to start with. About 20pc of the markets Unilever trades in – personal care, laundry powder, home cleaning, ice cream, tea and savoury food such as stock cubes and sauces – are own-label in Europe, compared to 12pc in the US. P&G, Unilever's US-based rival whose biggest brands include Gillette razors and Pampers nappies, reported an 11pc fall in profits earlier this week, admitting shoppers in the US are turning to own-label to save money. "We see a mixed effect as consumers without jobs or in challenging positions trade down," said Bob McDonald, chief executive.

Desirable new products are still a vital part of sales growth in the developed markets, and the consumer-goods companies have spent more on advertising to lure shoppers. Innovation is "not a sticker saying '€5 off' " Mr Polman said. "We do this seriously," he said, citing Dove conditioner which repairs damaged hair and longer-lasting deodorant as recent product improvements. But like everything else consumer goods companies are doing, their new improved products are aimed at least as much at the emerging markets as the traditional ones. "People there have been exposed to all these products and they want choices, they want something better," Mr Polman said. "Anyone who thinks they don't needs to catch up."

Industrial production suffered a surprise fall in June while factories continued to grapple with rising costs. The Office for National Statistics said today that industrial output fell back 0.5% on the month in June, reversing May's rise and undershooting economists' forecasts for a 0.2% pickup. The drop was mainly due to a fall in oil and gas extraction, the statisticians said, citing early maintenance work on oil fields. Yet the decline would not be enough to push down a first estimate of second-quarter GDP growth of 1.1% released last month.

Within the industrial sector, manufacturing posted a smaller rise in output than expected. Production went up 0.3%, matching June's increase but below the 0.4% forecast in a Reuters poll of economists. While factory output continued to rise, surveys suggest the pace of expansion is softening and experts warn there could be tougher months ahead for the sector with fragile demand in key export markets and a fiscal squeeze at home. "Manufacturing remains the star of the UK economic show, with further good news in today's ONS figures. However, many manufacturers we speak with are now reporting something of a summer slowdown, as growth in orders begins to level out after a period of rapid restocking and a burst of essential investment," said Graeme Allinson, head of manufacturing at Barclays Corporate.

Separate data from the ONS showed factories' input prices in July rose at a faster pace, up an annual 10.8% from 10.7% in June but slightly below forecasts for 11.4% inflation. There were signs though that companies were starting to pass some of those rises on to customers with inflation at the factory gate at 5%, little changed from 5.1% in June and above forecasts for 4.9%. The data echoed recent reports from food producers such as Flora margarine-maker Unilever and Hovis bread-maker Premier Foods that they were having to look at raising their prices. The ONS said food prices were by far the biggest factor in rising factory gate prices in July.

Jonathan Loynes, chief European economist at Capital Economics, said that overall though the thinktank expects producer prices (PPI) to ease over coming months as pressures from energy prices wear off and activity in the sector starts to slow. "One potential threat is the recent sharp rise in agricultural commodity prices. But provided they do not soar too much further, their impact on both PPI and consumer price inflation should not be too big. Overall, while the industrial sector is currently acting as a useful driver of overall economic growth, we don't see it is a source of strong inflationary pressure," he said.

German industrial production fell 0.6% in June from the previous month on unexpected declines in the construction and manufacturing sectors, government data showed Friday. Economists surveyed by Dow Jones Newswires had expected a 0.7% increase from May. "One has to put things in perspective: this contraction came on the back of a whopping 2.9% month-on-month expansion in May," Peter Vanden Houte, an economist for ING Bank, said in a research note. "While today's figures came in weaker than expected, the German growth locomotive is definitely not slowing down."

Friday's data were in contrast to manufacturing orders figures released Thursday, which showed German orders increasing 3.2% in June from May. "In light of the drastically improved orders environment, industry will above all remain a central factor in Germany's continued economic recovery," the ministry said in a statement as it released the data. The ministry didn't give a clear reason for the unexpected decline in production in June.

On an annual basis, industrial production grew 10.9% in seasonally adjusted terms and 14.7% in unadjusted terms. May output figures were raised to show a monthly increase of 2.9%, from 2.6% previously. Production in both the construction and manufacturing sectors fell 0.9% from the previous month. Output of intermediate goods—part of the manufacturing process—declined 1.0% on the month in June after an increase of 3.1% in May. The production of capital goods showed the biggest swing, to a 1.1% decline in June from a 4.1% increase in May.

Production of consumer goods was up 0.2% in June after a 1.2% increase in May. Production in the energy sector climbed 3.6% on the month in June, matching growth in May. Despite the unexpected drop, production across the May-June period was up 3.3% compared with the March-April period, the data showed.

Souring mortgage bonds that aren't backed by the government continued to cause heartburn for some of the Federal Home Loan Banks in the second quarter. Two banks reported second-quarter losses in part because of larger loss provisions for what are called private-label mortgage securities. In a sign of how losses have spread to the broader mortgage market from the subprime sector, the Indianapolis and Pittsburgh home-loan banks said they were expecting steeper losses on bonds backed by prime loans, or those to borrowers with good credit.

Overall, the Federal Home Loan Banks reported $326 million in combined second-quarter net income, down 71% from a year earlier, according to preliminary earnings reports compiled by the Office of Finance for the FHLB system. The $797 million fall in net income from a year earlier resulted from larger provisions for credit losses and net losses on derivatives and hedging activities.

Several home-loan banks have been weakened by bad bets on private-label securities they scooped up during the housing boom in a bid to boost profit. Now, those banks have had to take repeated write-downs on the value of those securities as foreclosures mount. That has forced some banks to reduce or eliminate the dividends paid to their members in a bid to shore up capital. The Indianapolis bank swung to a net loss of $12.9 million from the year-earlier net income of $53.3 million. It wrote down the value of its mortgage securities by $68 million.

The Pittsburgh home-loan bank swung to a net loss of $68.2 million from net income of $32.1 million. The loss was driven by write-downs of nearly $111 million on mortgage bonds. The Seattle bank, which has been among the hardest hit, reported net income of $8.2 million, compared with the year-earlier net loss of $34.3 million. The improvement resulted from gains on derivatives and smaller write-downs on its private-label securities.

Last month, Standard & Poor's Ratings Services lowered its ratings outlook on the Seattle bank to negative after its federal regulator reaffirmed its "undercapitalized" designation for the bank and asked for additional information as part of a capital restoration plan submitted last year. The Seattle, San Francisco and Pittsburgh banks each have filed lawsuits in a bid to force securities issuers to buy back busted mortgage securities. In separate lawsuits, they have argued that more than $23 billion in securities were sold with misleading information.

The 12 home-loan banks lend to more than 8,000 banks, thrifts and credit unions at below-market rates to finance mortgage holdings. The banks have about $850 billion in debt outstanding, making them collectively one of the world's biggest borrowers.

Some might call it blackmail. The governor of Wyoming calls it desperation. Governor Dave Freudenthal is threatening to sell off a chunk of one of America's most beautiful national parks unless the Obama administration comes up with more money to pay for education in the financially beleaguered state. He says he will auction land valued at $125m (£80m) in the Grand Teton national park, one of the country's most stunning wildernesses. Part of the park was donated by John Rockefeller Jr.

Other parts belong to the state government including two parcels of land of about 550 hectares (1,360 acres) designated as school trust lands to be "managed for maximum profit" to generate funds for education in Wyoming. At present Wyoming raises only about $3,000 a year from the land by leasing it to a cattle rancher. Officials have menacingly suggested that the property might make a nice site for a ski lodge.

Freudenthal recently wrote to the interior department asking the federal government to trade the park land for mineral royalties. "If the federal government won't dance with us, we will go look for another partner," said Freudenthal. "The purpose is to force the federal government to come to the table." Washington says it is negotiating, but Freudenthal says the issue has dragged on for a decade. "The way the federal government has treated us to date is that we are like the people who own the land, but they figure there isn't anything else they can do with it," he said.

Previous negotiations led Washington to offer 800,000 acres of federal land in a swap but state officials rejected it as "trash land" not worth nearly as much as their "prime, in-park real estate". "I admit we aren't as bright as those boys on the Potomac," said Freudenthal. "But this ain't our first county fair."

Sen. Debbie Stabenow (D-Mich.) introduced a bill Wednesday that would provide extra weeks of benefits to people who've reached the end of their unemployment insurance lifelines. The measure would provide 20 extra weeks of unemployment benefits and extend a tax credit for businesses that hire workers who've been unemployed for 60 days or longer. "Across our state, more than 35,000 people who have lost their jobs have also exhausted their unemployment insurance benefits," said Stabenow in a statement. "I know that these men and women want to work and have been trying their best to find jobs in this difficult economy."

Through June and much of July, the Senate was locked in an epic struggle just to reauthorize existing benefits for people who've been out of work for longer than six months. Many Republican senators suggested that the extended benefits, which in some states provided up to 99 weeks of help, discourage people from looking for work and make the recession worse. A study by the San Francisco Federal Reserve found that the extended benefits "have not been important factors in the increase in the duration of unemployment or in the elevated unemployment rate."

In a strong economy, state governments provide layoff victims 26 weeks of benefits. In normal recessions, states and the federal government partner to provide an additional 20 weeks. To fight the worst recession since the Great Depression, Congress in 2008 and 2009 passed several measures to provide up to 53 additional weeks of federally-funded benefits, broken into four "tiers." The Labor Department estimates that 1.4 million people have exhausted all available tiers.

The National Employment Law Project applauded Stabenow's bill. "NELP commends Senator Stabenow and her co-sponsors of the Americans Want to Work Act both for being champions of those hardest hit by the recession, but also for keeping the focus on the most important thing -- getting those who have exhausted their benefits back to work," said NELP's Judy Conti in a statement to HuffPost. "We need to support these workers and their families both in their efforts to stay afloat while unemployed through no fault of their own, but equally importantly, in their efforts to find work and rebuild their lives after the devastation of such prolonged unemployment."

The "99ers" have clamored for a Tier 5 via grassroots online organizing. Stabenow's bill would provide 20 weeks of additional benefits in states where the unemployment rate is above 7.5 percent. It's not clear whether the bill would impact the deficit or if it's "paid for," in budget parlance. The text of the bill is not yet available.

It's also not clear when or how the bill could pass the Senate, which adjourns for its August recess this week. Republicans have insisted that domestic spending bills be paid for, but this week they nevertheless attempted to filibuster a bill to provide aid to states that would have reduced the deficit by $1 billion. And a few Democrats have said they do not support giving the unemployed additional weeks of benefits.

But a refusal to help the unemployed contrasts sharply with willingness to help the rich. "We've got people on the [Senate] floor now saying they believe there's sufficient capability to eliminate the estate tax, to give billionaires very large tax cuts," Sen. Byron Dorgan (D-N.D.) told HuffPost. "A country that can do that coming through the deep recession that we've had ought to be able to help those who are chronically out of work, even beyond the 99 weeks." Stabenow's bill is cosponsored by Sens. Chuck Schumer (D-N.Y.), Harry Reid (D-Nev.), Dick Durbin (D-Ill.), Carl Levin (D-Mich.), Bob Casey (D-Pa.), Chris Dodd (D-Conn.), Sherrod Brown (D-Ohio), Jack Reed (D-R.I.), and Sheldon Whitehouse (D-R.I.).

The pleas of hundreds of thousands of the long-term jobless were answered this week when a dozen Senate Democrats cosponsored a bill to provide additional weeks of unemployment insurance.But given the incredible difficulty that Democrats faced breaking a GOP filibuster just to reauthorize the existing extended benefits, how do Sen. Debbie Stabenow (Mich.) and her cosponsors expect the bill to pass?

"I think when it comes down to it, it's going to rely on people like myself contacting their local representatives," said Jeff Lawson of Fresno, Calif., who told HuffPost he lost his job as a business consultant in 2008 and has since exhausted 99 weeks of benefits. "It's going to require forcing some of the moderate Republicans taking a stand against their own unemployed constituents in their own states."

The extended unemployment benefits that Congress reauthorized in July provide the unemployed up to 99 weeks of benefits in some states. Congress always gives the unemployed extra weeks of benefits during recessions, but in the worst recession since the Great Depression, an unprecedented 99 weeks of help still isn't enough for some. It's been estimated that as many as 1.4 million people have exhausted all four "tiers" of federal benefits. There are nearly 15 million people clamoring for just three million available jobs.

Some of the "99ers," as they've become known, organized online and coordinated lobbying efforts, which have resulted in phone calls, faxes, and even a petition delivery to Capitol Hill. Lawson said he made several calls himself, and had been assured by staffers over the previous months that "they weren't going to forget the 99ers." They didn't. "Their lobbying efforts of member offices certainly making an emotional impact, particularly on the staffers working on those issues who talk to their bosses about them," said one Senate Democratic aide. "People power does still exist -- particularly when it's tireless and unrelenting."

But Stabenow's bill, which would provide tax credits another 20 weeks of benefits in states with unemployment above 7.5 percent, faces incredibly tough sledding in the Senate. Democrats there struggled for nearly two months to reauthorize benefits, with Republicans and Nebraska Democrat Ben Nelson insisting that the measure not add a dime to the deficit even as 2.5 million people missed checks. The soonest this bill could possibly come to the Senate floor, if it ever does, is September.

Democratic strategists outside Congress said it's a no-brainer to push the bill, even if it fails to get anywhere. "What's the alternative to trying to extend unemployment insurance? Give up and turn your back on the American people?" said Todd Webster, founding partner of the WebStrong Group and a former spokesman for Senate Majority Leader Tom Daschle, who noted that the bill gives small businesses incentive to hire layoff victims. "On the politics of it, the messaging of it, and the policy of it, it is sound legislation."

Dave "Mudcat" Saunders, a former adviser to Virginia Democrats Mark Warner and Jim Webb, agreed. "I think the politics of it is magnificent. All over the country, the working people have been screwed by our government, so the least they can do is put a few beans on the table," Saunders told HuffPost. "If you look throughout the south, the manufacturing south, we ain't making shit anymore. The proof is in the pudding: The damn Mexicans are swimming across the river. Pretty soon the hillbillies are gonna swim across the river to Mexico."

Paul Brogan, who told HuffPost he received his final unemployment check in April, said he appreciated the bill even though it's a long shot and it wouldn't help him -- he lives in Portsmouth, N.H., where the unemployment rate is far below 7.5 percent. "I don't think it will pass, because with the election coming up it's going to be painted as something else that's going to increase the deficit, and it will be presented in such a way by Republicans and even some Democrats as a horrible, awful thing because these people are so lazy if they can't get a job in nearly two years," said Brogan, 59, a laid-off grantwriter. "Even the fact that they're willing to try this will help some people psychologically feel they're not alone, that somebody actually gives a damn."

Chinese regulators have called for stress tests on loans to a range of industries, including cement and steel, whose fortunes are closely tied to property markets on the brink of a correction, official media reported on Friday. The tests, part of a broader investigation into banks' ability to withstand falls in housing prices, point to the government's determination to hold tightening policies in place until the property sector cools off.

The tests will probe the impact of a 60 percent plunge in housing prices, but analysts warned against reading too much into the extreme scenario, saying the market was likely to weaken but not collapse in such a spectacular fashion. "The banking system has made quite a lot of loans to industries upstream and downstream from the real estate market and their risks are intimately connected to the real estate market," the Shanghai Securities News said. "Therefore, regulatory agencies have demanded that corresponding stress tests should also be conducted for industries such as steel, cement and building materials."

China stepped up a tightening campaign earlier this year to squeeze any bubbles out of its red-hot property market, but while transactions have fallen, prices have barely dipped. The China Banking Regulatory Commission (CBRC) declined to comment directly on reports of the ultra-stringent bank stress tests. But in a statement on its website late on Thursday, it said that stress tests differed from bank to bank and formed part of continual efforts at risk management. Hypothetical scenarios examined in stress tests did not reflect regulators' forecasts for the property sector and nor did they herald any change in policy, the CBRC added.

"The tests show the government is not happy with the current prices. Prices haven't been falling deeply enough," said Cao Xute, a property analyst with Sinolink Securities in Beijing. "If prices don't fall in the next couple of months, the government could tighten further, through monetary and tax measures," he said. Industry insiders said that would not be necessary. "Price growth in key cities has declined and property sales have plummeted," Zhu Zhongyi, vice-chairman of the China Real Estate Association, a top industry think tank, was quoted as saying in the China Daily. "So there is little possibility that the government will launch more tightening policies for the real estate sector before the end of the year," Zhu added.

Shares of developers listed on the Shanghai Stock Exchange fell about 3 percent over two sessions after the stress tests were reported, before paring some of those losses at the close of trading on Friday. Shares of cement producers and steel makers climbed in line with the broader market's 1.4 percent gain. The property sector is a pillar of China's economy, accounting for about a quarter of all capital spending, so a collapse in housing prices could reverberate widely.

Targeted TestsConcerns about a housing bubble have centred on top-tier markets where price rises have been most extreme. Banks in seven cities, including Beijing, Shanghai and Shenzhen, have been asked to examine the impact of a fall in property values of up to 60 percent, the official China Securities Journal reported. Banks in the seven cities must submit the stress test results to their provincial regulator before August 13, it added. There would be no "one size fits all" method and banks would decide for themselves how to conduct the tests based on the conditions of their local real estate market, the Shanghai Securities News said.

The CBRC has also instructed banks to stop extending mortgages to people buying their third homes in at least four booming cities -- Beijing, Shanghai, Shenzhen and Hangzhou. The government launched a property tightening campaign in April, demanding higher down payments and curbing loans to buyers of multiple homes, because of concerns that prices were rising too fast and morphing into a dangerous asset bubble. Speculation had been mounting that Beijing might relax the controls as the economy slows in the second half, but many analysts now believe that it will hold them in place until there is a clear correction in prices.

"In top-tier cities, prices will probably fall by 20-30 percent, returning to the levels where they started the year at the end of 2010," said Wang Xia, a property analyst with CCB International in Beijing. Earlier stress tests showed that Chinese banks could sustain a drop in housing prices of up to 30 percent without a sharp rise in bad debt ratios. Those tests, conducted in May, also looked at the risks posed by loans to sectors tied to the property sector, such as cement and steel.

In all likelihood, China has entered the most critical and taxing period since the country was reopened to the outside world in the 1970s. Domestically, there are a slew of issues, any one of which could create instability. These issues include:

Home affordability

Leadership instability

A potential if not actual housing bubble

The rising income and wealth differential between those who have made it and those who have not

The country's continued dependence on exports as its principal driver of growth

Policy making that focuses on short-termism without addressing structural and longer-term issues, etc.

Impact of rising wages

Energy intensity

Role of foreign companies

Resource dependability - water, raw materials, etc.

The list could go on, but these issues are evolving at a time when the global environment is fraught with difficulties and uncertainty, making policy making within China that much more complex. The infighting within the leadership, which goes beyond the normal tensions that often occur during the period leading up to a change in leadership (due in 2012), is making policy management more difficult and has led to conflicting views being expressed by various factions, in the media.

Few can know the full story of what goes on within the State Council, but there appears to be a battle royal being fought over the real estate sector. There are those within the leadership who are concerned that average home prices have gotten too high for most first-time buyers (see our previous visit report). They want to see average prices fall by 10-20% across the country. Against this group are not just real estate developers but local governments and many others within Beijing. This group, of course, depends for much of their revenue, or in the case of developers, their profits, on rising land and building values. In fact, local governments depend on land sales for one-third of their revenues. In 2009, land sales brought in RMB 1.6 trillion, compared with a total budget income of RMB 3.3 trillion. Moreover, land is the most-used collateral for bank loans; its value is thus crucial to the credit edifice.

Many local governments have not adhered fully to the new restrictions imposed by the central government on the real estate sector. This has infuriated those in Beijing who are determined to encourage a fall in home prices. In effect, what is being seen is a battle between central and local governments. In our view, this is a fight that central government cannot afford to lose.

The scale of speculation in real estate is enormous. There ia a total of 64.5 million apartments and houses lying purchased but vacant in urban China, about five times the surplus in the USA, according to an economist from the Chinese Academy of Social Sciences.

A report written by the National Bureau of Economic Research in July this year provides interesting data on China's housing market. Real housing prices have risen by 140% since the first quarter of 2007. In the first quarter of this year, house prices rose by a record 41%, since when it appears that prices have stabilised but not fallen. Price increases have not been driven by any shortage in housing. In five of the eight markets that the authors of the report studied, the net new number of housing units provided since 1999 was at least as large as the net increase in the number of households. In the three others, the relatively modest gap does not explain the huge rise in home prices.

In Beijing, there has been an almost eight-fold increase in land values since 2003, but since the end of 2007 land prices have nearly tripled. The impact of rising land prices on home and apartment prices has been equally great. From 2003 to 2007, the ratio of land-to-house values hovered between 30% and 40%, but since then it has doubled to just over 60%. The report also found that when a central government state-owned enterprise (SOE) was a winning bidder for land, prices rose by about 27% more than if they had not been involved, thus showing the influence that SOEs bring to bear on land values, an influence that grew in 2009 when they became more active. A separate report shows that so far this year 82% of Beijing's land auctions have been won by SOEs.

Price-to-rent values in Beijing and seven other large markets across the country have increased from 30% to 70% since the start of 2007, and current price-to-rent ratios imply very low user costs of no more than 2-3% of house value. Very high expected capital gains appear necessary to justify such low user costs of owning. The report continues with calculations suggesting that even modest declines in expected appreciation would lead to large price declines of over 40% in markets such as Beijing.

In summary, against a background of cheap money and plenty of credit, house prices across the country have become unaffordable to most first-time buyers. In Beijing, for instance, average house prices have been between 14 and 15 times incomes for the past three years, but rose to 18.5 times in the first quarter of this year. If average home prices do not fall significantly across the country, the risk is that Beijing will be forced to tighten policy another notch. A softening in monetary policy is likely only if average home prices fall within the 10-20% range.

This is what the policy fight is all about, because if these price developments continued unchecked the leadership would risk encountering social instability. Workers everywhere are demanding higher wages. The demands are not just amongst the SMEs and foreign companies, but within the SOEs. We understand that a significant number of SOEs have seen de facto strikes, just not in name. The workers clock in, go to their stations, put down their tools, and clock out without doing any work.

The list of grievances is long, with rising wages being one. How government deals with this situation remains to be seen. We were reminded that in 1989 it was only when the workers joined the students that an explosive situation developed. No one is expecting anything remotely similar, but these developments do illustrate the tensions lying beneath the surface which the leadership is having to grapple with.

Politics in China is all about maintaining social stability. The demographics of the country are forcing the leadership into a new economic model, which will be partially driven by the level of average wages over the coming five years being at least double that of the last five years.

Dr Clint Laurent of Global Demographics has consistently stated that China's statisticians have overstated the country's birth rates since 1990. This implied, as he said in a paper in 2005, that China's labour force would peak at 770 million in 2008, falling to 690 million by 2025. Another major consequence is that the important age group of 20-39 peaked in 2000 at 458 million and by this year will have fallen by 4%.

The consequences of these demographic changes are immense. First, wage inflation will be a given, not just in the private and foreign sectors but amongst the SOEs, as we mentioned earlier. Second, it means that manufacturers will introduce automated machinery to reduce the workforce (the new booming sector) and improve productivity. Third, rising wages lay the foundation for better consumer spending; though households, as in the past, will have to cover the losses racked up by local governments, according to Michael Pettis, a visiting professor in Beijing. Fourth, disposable income in the rural sector is improving. This development, combined with subsidies granted to rural households for buying a range of household appliances, has lifted the demand for these products in rural areas. Nonetheless, it is human nature that when a gift is offered there is a rush to buy, so how long the subsidies will affect sales of appliances is a moot point.

Finally, policy makers know that the time has come when the country's dependence on exports for growth must be replaced by domestically driven growth that focuses on consumer spending and not fixed-asset investment. Local coastal governments, however, will fight to see that exports from their regions continue to drive their own growth; but their success will depend on global trade.

Much of the surge in exports so far this year has been due to the replenishment of inventory within the distribution and sales channels and to the expected increase in export prices out of China. Inventory replenishment has now run its course in Europe and the USA. Given the expected slowing of consumer spending in the US in the second half of this year, some inventory liquidation might actually be seen. Even so, exports from China should weaken sharply by year-end.

The move to de-peg the RMB from the US$ gives Beijing the flexibility to either appreciate or depreciate the currency depending on global conditions. Any appreciation will be modest given the small margins that most exporters enjoy. If our profile of the world economy is even half correct, we should expect to see the RMB depreciate against the US$ and other currencies post-2012.

Wage inflation threatens to feed into general inflation. Food prices remain quite stable overall for now, but there is a risk that they will be rising by year-end. Vegetable prices are rising sharply, according to friends who shop every week. Meat prices are stable for the time being, but wheat prices had risen well above the government's sale price of RMB1800, to over RMB2350, when we last looked. Friends fear that food prices will be rising in the fourth quarter, with some economists predicting that CPI will be increasing at a 5% rate by then. We are told also that the cost of getting an electrician, plumber, etc. in to do odd jobs has doubled over the last year in Beijing and other major cities. Our general take is that China is on the threshold of seeing an overall increase in the cost of living. Whether it shows up in official numbers or not, households will feel it.

A long-term concern is whether China has key resources to maintain the growth profile that the country has experienced over the last 40-odd years. Water may well be a key constraint. China's water-resource capacity is only ¼ of that of the world average. In other words, the country has 20% of the world's population but only 7% of global water resources. The problem is compounded by the dispersion of those resources. The area around the Yangtze River accounts for 36.5% of the country's land mass, but holds 81% of its water. North of the Yangtze River lies 64% of the country's territory, but only 19% of its water resources.

A World Bank report shows that more than half of China's 660 cities suffer from water shortages; and 90% of cities' groundwater and 75% of their lakes and rivers are polluted. These are examples of the physical constraints on growth. China's rapid pace of industrialisation has left the country with severe burdens and a massive clean-up, not just in urban areas but throughout the countryside. Water is a global depreciating resource, as William Houston and Robin Griffiths showed in their book Water: The Final Resource. History also shows that wars are fought over access to water.

Local government indebtedness is being exposed as a potential time-bomb, as one friend remarked to the writer. Whatever the correct figure, it is large and is in the range of RMB6 trillion to RMB11.4 trillion, equivalent to 71% of the country's nominal GDP. Some reports suggest that banks will have difficulty recouping about 23% of what they have loaned out. The China Banking Regulatory Commission has told banks to write off nonperforming project loans by the end of this year.

No one should be surprised by these numbers. Back last October we were told - and we reported - that one-third of the fiscal stimulus and bank lending never went into the real economy. There are likely to be more hidden black holes. One consequence is that credit is tight, with receivables mounting across a wide swath of manufacturing.

Markets will sense some of these uncertainties. In line with falling global equity markets, which should start very soon, the Shanghai and other Chinese stock markets are likely to fall sharply by year-end. This will take the stuffing out of consumers' willingness to buy large-ticket items like cars and appliances. Already, so we hear, inventories of these items are growing within the distribution systems, with production levels likely to fall over coming months.

Many companies believe that the weakness now being seen is seasonal. But others, whose opinions we respect, believe that weakness will be seen at least until year-end. Prices of raw materials, semi-fabricated products, and finished goods are likely to start falling very soon. Instead of accumulating inventory, stocks within the entire manufacturing and distribution systems will be slashed, repeating to a lesser degree what occurred in the second half of 2008.

Construction activity will continue to slow, notwithstanding the continued high rate of completions, consumer spending will slow also, exports will be weak in the fourth quarter, and growth of fixed-asset investment will be lower. By year-end, the psychology of businessmen and consumers will have shifted from optimism towards pessimism in line with movements in the Shanghai stock market. Real business activity will be pretty flat in the fourth quarter. The latest PMIs from the Government's Logistical Office and from the HSBC both indicate a slowing economy. The former is geared more to the SOEs and the latter to the private sector. The HSBC sub-index of new orders fell from 49.7 in June to 47.9 in July.

In summary, we doubt there will be any easing of policy until average house prices fall into the 10-20% range. China is transiting into a very difficult period as focus shifts towards sustainable domestic growth and away from short-term measures to defend the 8% GDP mantra. This transition is occurring when the existing leadership is preparing to give way to the new set in 2012, when social stability could be threatened if there are policy mistakes, when the rest of the world is starting to stand up to China's increasing assertiveness, and when foreign companies are questioning their future in China. China will muddle through, but it won't be an easy ride.

"Well, no. Technically this is more like an American Express card. It looks just like a credit card, but I have to pay the full balance immediately every time I use it. There’s no credit line attached to it, and it doesn’t let me borrow. But I like to pretend it’s a real credit card."

Suzy sighs. "You have this AmEx-like card, and you call it your Social Security Card, right?" asks Suzy.

"Right," says Billy. "And once a year I figure out how my Social Security financial picture looks, and I issue a report I call the Social Security Trustees Report. Today is that day."

Suzy shakes her head. "And you’re smiling. I was afraid of this. Let me review the situation to make sure I understand it."

"You typically get an allowance from Mom and Dad of about $18,000 per year. That’s money that the rest of us in the family don’t get to spend, it’s all for your purposes. You typically spend more than your allowance, about $20,000 per year, and you’ve been gradually accumulating credit card debt (on a real credit card that lets you borrow money from others). Lately you’ve been spending much more – like $25,000 this year and running up a huge amount of new credit card debt. Two days ago we looked at you lobbying Mom and Dad to allow your allowance to increase by about $500 per year on January 1st. I complained because that’s $500 less each year for the rest of the family."

"Right, but you’re an irresponsible little sister who won’t let me have a bigger allowance when I have this enormous credit card debt."

"Yes, but you have a bad habit of taking your allowance increases and spending them, as you did with that health care thing. But let’s not rehash Tuesday’s argument. As I understand it, you have two expensive spending habits, both centered on your iPhone: you spend a lot of money buying both music and movies. For some reason that I don’t understand, you call the music ‘Social Security,’ and the movies you call ‘Medicare.’"

"These two spending habits are growing rapidly. This year you’ll spend $4,800 on ‘Social Security’ music, and another $3,600 on ‘Medicare’ movies."

“So far, so good," says Billy.

"Right. And you always charge the music you buy to your ‘Social Security Card,’ and you charge the movies to your ‘Medicare Card.’ But these aren’t real credit cards that let you borrow. They work like American Express cards that require you to pay the full balance as soon as you incur the cost."

"Now of the $18,000 per year that you get in total allowance from Mom and Dad, some of that is for specific chores that you do. This year about $4,400 of that $18,000 total allowance is compensation for mowing the lawn, and you dedicate that portion of your allowance to your Social Security music spending. You call that your Social Security payroll tax allowance."

"Uh huh."

"And this year another $1,200 or so of that $18,000 annual allowance is compensation for shoveling the snow off the driveway. You dedicate that portion of your allowance to buying Medicare movies. You call that your Medicare payroll tax allowance."

"Doin’ great, sis."

"Thanks. Now today let’s focus just on Social Security. Since this card doesn’t actually let you borrow, you have to immediately find the cash you need when you buy Social Security music. This year you will spend $4,800 on Social Security music. You’ll take the $4,400 of dedicated Social Security payroll tax allowance you got because you mowed the lawn, and use that to pay for most of the music. That’s real cash you’re spending. But you need to find another $400 of cash to pay for the rest of the Social Security music costs incurred this year. That $400 comes from the rest of your allowance, from money not for any particular chore and not dedicated to any particular purpose. We can call that big stream of allowance money from which the additional $400 per year comes your general revenue allowance."

"Keep going."

"You project your future music spending will grow faster than your lawn mowing dedicated revenues, so next year you’ll take more than $400 from your general revenue allowance to close the gap between your Social Security payroll tax allowance and your Social Security spending."

"Right, but it wasn’t always like this," says Billy. "I used to buy less music, so I was actually making more in dedicated Social Security payroll tax allowance from mowing lawns than I spent on Social Security music."

"And in past years what did you do with the extra money you made from lawn mowing that you didn’t spend on music? What did you do with that money that was supposed to be dedicated for Social Security spending?"

"Well, I carefully kept track of how much extra I made in Social Security payroll tax allowance that I didn’t spend on Social Security, and I wrote down those amounts on this piece of paper. I call this piece of paper my Social Security Trust Fund. Today I’m issuing my Social Security Trustees’ Report, which shows that I have a balance of $17,400 in my Social Security Trust Fund. I do the same thing for Medicare, sort of. That’s actually a bit more complicated."

Suzy looks quite puzzled. "This is messy enough, so today let’s stick to just Social Security. You kept track of past Social Security payroll tax allowance that you didn’t spend on Social Security music, and that has accumulated to $17,400."

Billy, "Well, actually, less than that, but I gave myself credit for interest."

Now Suzy looks worried. "You gave yourself credit for interest. But I’m confused. What did you do with the actual money in those past years?"

"What money?" Billy asks.

"The portion of your allowance that resulted from your lawn-mowing that in past years you didn’t spend on music. Your extra Social Security payroll tax allowance. Where did the cash go?" asks Suzy.

"Well … I … um …" Billy stutters. "I spent it on other stuff."

Suzy shakes her head. "Like what?"

"Oh you know, everything. I spent it on boxing lessons so I could defend myself, and I bought an awesome Trapper Keeper notebook with it. I bought a new bike for transportation, and I spent some of it going to museums and movies and parks. I even spent some on my online farm…"

"OK, stop, stop. You’re telling me you spent on other things the extra allowance that in the past you had dedicated to spend on Social Security music, but you also wrote down those amounts on this Trust Fund paper and said that it should go to future spending on Social Security music. This piece of paper you call a Social Security Trust Fund isn’t actually money. It’s just an accounting convention you created to keep track of how much of those past dedicated Social Security payroll allowance dollars you didn’t spend on Social Security, but you did spend on other things."

"Plus interest," adds Billy, nodding.

"Plus interest," sighs Suzy. "But this is interest you’re crediting on non-existent money. Now that your Social Security music spending has increased, each year you’re spending all your dedicated Social Security allowance on Social Security music, and you’re tapping into your general allowance to pay for the rest of your Social Security costs. You’re also subtracting this general allowance contribution from the ‘balance’ on your ‘Social Security Trust Fund’ piece of paper, even though there’s no real cash involved here. Subtracting from this so-called Trust Fund balance is pure optics, just like adding to that balance was in the past when you were spending the extra cash for other purposes."

"Riiiiiiight. Why does that matter?" asks Suzy. "That piece of paper that you call a Trust Fund has no actual resources behind it. There’s no money there."

"But it shows how much I should be able to draw from my future general allowance to spend on Social Security music, above and beyond my dedicated Social Security payroll tax allowance from mowing the lawn!"

"You can tell yourself that, but where does the money come from? You can make whatever promise you want about how much you will spend on music in the future, but the cash is going to have to come from somewhere. In fact, you’re taking $400 away from other needs just this year to pay for this year’s Social Security music spending."

"Let me ask you this," continues Suzy. "Suppose we doubled that number on your piece of paper. Suppose we just cross out the $17,400 balance on your so-called Social Security Trust Fund, and instead we write in $35,000. We’ll round up."

Billy says eagerly, "Suzy, that’s fantastic! Now I won’t run out of money for music spending any time soon! With $3,500 in my Social Security Trust Fund, it will take decades to draw down that balance."

"That’s exactly what worries me," replies Suzy. "We haven’t actually created any more money by doing this. We have just changed an accounting balance for an imaginary account. You can tell yourself that you have more money to spend on Social Security music, but you don’t actually have any more cash, now or in the future. It’s not like a bank account balance, or even like the real credit card debt you have been accumulating. I’m really worried that this Trust Fund balance and your Trust Fund reports are giving you a false sense of security, and they are preventing you from taking a hard look at how much you spend each year on Social Security music."

"You don’t have enough dedicated allowance this year to pay for your Social Security music spending this year. You have an immediate cash flow problem, in that you’re having to sacrifice $400 of other stuff just this year to make up the difference between what you collect in dedicated Social Security payroll tax allowance, and what you spend on Social Security. And that $400 gap will be bigger next year, and the year after that."

"Billy, this is a problem for you right now. You need to slow the growth of your Social Security music spending. When you combine that with your spending on movies that you call Medicare, over time it’s going to grow to consume most of your $18,000 annual allowance. It will squeeze out your ability to spend your general revenue allowance on those boxing lessons, those school supplies, those museums and movies and parks and even your online farm."

"You forget, sis," says Billy with a grin. "While this Social Security Card isn’t a real credit card, I do have a real credit card. I can just borrow the extra money I need and run a bigger deficit this year. I promised myself I’d spend this $17,400 on Social Security music over time, and I can’t break that promise. I’ll just keep increasing my borrowing on my real credit card to do so."

"And next year, and the year after that, …" cries Suzy.

"Yep. I plan to increase my spending each year on Social Security music. I’ll draw more from my general fund allowance to pay that which is not covered by my dedicated Social Security payroll tax allowance. If that threatens to constrain my other spending, I’ll just borrow and run up my credit card debt."

"But there’s no money there. And if you keep telling yourself you’re OK for another 27 years, you’re not going to do anything about the real problem, which is that you can’t afford this growth rate of your Social Security spending. At some point this cash flow problem is going to cause your real credit card debt to get so high that you’ll bump against your credit limit. Then your only options will be to drastically cut back on your Social Security spending, or slash the amount your spend on other stuff, or …"

Suzy gasps. "Oh, no. Or you’ll wait until it’s too late, and then demand a bigger allowance, leaving even less money for the rest of the family."

104 comments:

I have, alas given up on trying to get the world to understand the meaning of "to decimate."

Unfortunately, the ill-educated of the world have been unable to distinguish between "devastate" and "decimate."

Decimate; surprise, means "to reduce by one tenth." If an army loses a tenth of it's soldiers; that really is very, um, devastating.

But "devastating" is more often used to describe something near to total destruction.

And that is how decimate is now used. They're wrong. But they're also impossible to refudiate, irregardless.

My precise point of giving up was when I recalled my high-school english teacher, who was adamant that language is not a fixed phenomenon. It moves, changes, evolves. So, I looked decimate up in a couple dictionaries; expecting, hoping, to be vindicated.

Alas. The New Oxford American Dictionary:

"1 kill, destroy, or remove a large percentage or part of : the project would decimate the fragile wetland wilderness | the American chestnut, a species decimated by blight.• drastically reduce the strength or effectiveness of (something) : plant viruses that can decimate yields.2 historical kill one in every ten of (a group of soldiers or others) as a punishment for the whole group."

(Actually, 99.99% of American Chestnut trees were killed, one way or another).

So, evidently I'm a dinosaur.

I've quit attempting to get people to understand the unequivocal root of "decim". But I've also quit using "decimate." I just work around it.

Argentina has faced at least 2 financial crises that seriously impacted the middle class in that past 20 years. In both cases, the underlying cause of the crisis was unpayable debt, but the effects on the middle class were completely different. The 1989 financial crisis ended in hyperinflation that wiped out middle class savings while the 2001 crisis ended in a deflationary debt collapse that also wiped out middle class savings.

Why did one debt crisis end in hyperinflation and the other debt crisis end in deflation? Only part of the answer lies in the currency. In 1989, the Argentine peso was not pegged to the dollar, and that lack of a fixed exchange rate resulted in a disorderly currency collapse as the government attempted to pay huge debts through currency devaluation. In 2001, the new Argentine currency was pegged to the dollar, and the inability to devalue the currency contributed to the loss of export advantage, high unemployment, slowing economic growth, and eventual debt crisis when international investors lost confidence and withdrew their funds.

My question: I&S have argued that governments can't print their way out of a debt crisis because printing will immediately cause a spike in interest rates and thereby precipitate an Argentine 2001-style deflationary collapse. However, why was the Argentine government in the 1980s able to resort to inflation to attempt to pay its debts. Without question, the attempt to inflate didn't solve the debt problem, but hyperinflation was a real outcome for the middle class in 1989. The middle class lost much of its savings when inflation reached 5000%.

Since not many people know about Argentina's 1989 crisis, I've lifted some relevant details from wikipedia and pasted them below:--------------------"The state eventually became unable to pay the interest of this debt and confidence in the austral collapsed. Inflation, which had been held to 10 to 20% a month, spiraled out of control. In July 1989, Argentina's inflation reached 200% that month alone, topping 5,000% for the year. During the Alfonsin years, unemployment did not substantially increase; but, real wages fell by almost half (to the lowest level in fifty years). Amid riots, President Alfonsín resigned five months before ending his term, and Carlos Menem, who was already President-elect, took office."---------------------

El gallinazo, If I remember correctly, aren't you living in Argentina now? Have you talked to people who lived through both the 1989 and the 2001 crises? It must have been quite a whiplash to go from a hyperinflationary loss of savings to a deflationary loss of savings all within almost 10 years. How much has Argentina's middle class shrunk within the past 20 years?

Jean- alas, too late. I'm 95% sure I got on Nixon's shit list in 1969, when I publicly walked off the dais of a speech being given by his Solicitor General; a few days after Kent State I was the only one; so I kind of stood out (He was a flaming Nazi, is why, and rabidly opposed to free speech.) Since then- I went to China, a couple months after Tiananmen Square. Strike two. At least.

It's called Guilt By Association; and is uniformly applied to any cluster of persons not of the main persuasion.

It is starting to be the "in" thing these days to predict calamity in the financial markets,at least on the edge of the mainstream.A whole lot of people are worried the actions of the "Masters of the Universe"will prove to be more like a cheap Carnies sideshow,complete with a shell game rigged for the marks...and guess what? ,If your not a Carnies...your a mark .

Here we go with the real "interesting "part of real -life adventures.How do you tell someone who has a contract with you they have faithfully fulfilled...that you cannot pay them because their pension went [poof!] because of bankster shenanigans.[Can I sell tickets to the show?] And I think they have already been getting some real good feedback from their "Ideas" about waiting to 70 for social security.I expect that might be "The straw that breaks the camels back"...or not I just expect more bad things...more karma load headed the USAs way. Bee good,or Bee careful

Every comment,every word you post on the net,is on file.It never,ever goes away.

Anonymity is a joke.

Stoneleigh has gained a following of folks who have been "enlightened"with a understanding of reality that makes our current paradigm look less like a tea party and more like a barbecue with them as a main course. If any of my rants are not suitable for this forum,I am sure that llargi will not be shy about deleting them. Telling the truth when the truth paints a grim picture of where we are headed has never been "popular" with the powers that be,however her message is one of sane,rational,response to these grim truths.The thing that might terrify the bureaucratic type is that she is so mild mannered,erudite,warm and friendy,its very difficult to paint her "presentations"as a "revolutionary"gathering,though,is telling the truth when every one in the government is lying a revolutionary act?

I doubt if the actions/reaction at the library was one to be concerned about.If you recall,there has been a heavy-handed response to anything resembling community "organizing" by the Canadian government/officials lately due to their being a host .gov and wanting to show they could crack down on their citizens with the best of them...

you've said a number of times that the bond mkt will punish the Fed if they start to print. well, they have been printing over the past 2 yrs, approx. 1.5T on their balance sheet and probably much more hidden. but interest rates have done nothing but go down.

and to say that the Fed follows bond yields doesn't seem to be quite right. when Bill Gross and Gary Shilling say they are buying T's b/c the know the Fed is going to keep the short end of the curve at zero, implies to me at least that they "anticipate" or "front run" what they think the Fed will do. which is the cart and which is the horse?

The big difference between TAE and Shadowstats really boils down to an assessment of strength of the bond market, and its predicted ability to restrain the central banks from monetizing debt.

Currently, deflation is clearly winning in the US, based on the decline in bank credit outweighing monetization. But now we're talking about more monetization, and I'm wondering just how well the bond market will do its job of restraint.

We have a few examples in the modern era of debt monetization: Japan, England 09, and US 09. Did the bond market restrain their actions? It didn't seem like it. Likewise, in Weimar Germany, did the bond market stop the central bank at that time?

When I look at history, it appears that a sufficiently motivated central bank can print money in excess of losses due to the evaporation of bank credit.

Instead of simply (re)stating your opinions, can you point to specific cases in history where a motivated central bank was stopped by the bond market from monetization - especially when that debt was denominated in the country's own currency?

I'm not being snarky - my only goal is to see what will happen clearly. I'm trying to figure out how to best protect myself, and for me this subject is not even slightly about ego, it's about doing the right thing, for myself and my family.

I vote for more practical advice and commentary and less polemical journalism. What's the point of the angry polemics anyway? The endgame has already been determined and no amount of shouting and complaining changes anything. It's really tiresome and annoying to read through the same boring and worn-out complaining day after day.

This is my first visit here via links from transitiontowns New Zealand. I'm very pleased to have found commentators who can put into reasoned argument those things that seem intuitive to me but I have not the financial understanding to explain in my own blogging.

I think it is inevitable once your interests go down this path that your views will become somewhat radicalized. Jean, I daresay the FBI have noted your post today and won't give you too much heat for following this blog.

Of course the Establishment wants to minimise punters being exposed to advice contrary to the mainstream. One can take this as a compliment to the veracity of the analysis given on these pages.

Greenpa, would you like to refute that or repudiate it? because you can't do both in the same one word!!

My sense of panic is abating somewhat- now to decide what tangible assets to convert my (meagre)wealth into!!

@Jean, I don't know how one can avoid making political observations when we morphed into more complexity as in a financial, political and environmental crisis.What does one do when the finreg legislation ensures less transparency, not more. How do you make appropriate financial decisions in such a political environment? It is not radical but prudent to know what the politicians are up to, what they say versus what they do and where their funding comes from.A small case in point is that Obama promised to rid Washington of lobbyists. I read that there are now at least 25 lobbyists per elected politician. Sure, I'd like to ignore that information but it would not be wise money management to do so.One has to wonder how many lobbyists compose the Cdn agenda?In short, context matters.As for Stoneleigh's experience in Montreal I am interested to know what motivated La Grande Bibliotheque to take the position they did. We don't know the whole story.If I lived in Montreal I would drop in and ask. Misunderstandings do occur.Not once ,either on this blog or in person ,have I ever heard Stoneleigh advocate for " trouble". She has consistently advised a cognitive override response to evidence of system breakdown .She has been consistent in her advice to direct one's energy towards preparations, to community building.I consider TAE a safe place to get a rant out of my system. We all have 'em. That does not mean we act them out.Thanks for your comment as I, too, have been concerned about the Montreal reception given to our patron saint, Stoneleigh.

There are a number of anonymous browsing services that offer to hide your visits to whatever websites you'd rather not be photographed walking in the front door of. I have no way of knowing how many of these services are offered by the secret police, and how many by criminal syndicates gathering data for blackmail.

Even if you don't call attention to yourself by using these "anonymous" services, I think it likely that ALL web traffic is being kept track of. If from time to time you post "I'm NOT an anarchist", I'm sure it will go in your file. Of course, the secret police know that they can't believe what people say, so that might get you special attention.

"JHABUA, India — Inside the drab district hospital, where dogs patter down the corridors, sniffing for food, Ratan Bhuria’s children are curled together in the malnutrition ward, hovering at the edge of starvation. His daughter, Nani, is 4 and weighs 20 pounds. His son, Jogdiya, is 2 and weighs only eight.

"Landless and illiterate, drowned by debt, Mr. Bhuria and his ailing children have staggered into the hospital ward after falling through India’s social safety net. They should receive subsidized government food and cooking fuel. They do not. The older children should be enrolled in school and receiving a free daily lunch. They are not. And they are hardly alone: India’s eight poorest states have more people in poverty — an estimated 421 million"

George Orwell said: "During times of universal deceit, telling the truth becomes a revolutionary act." Information about protecting savings IS perceived as a form of subversion (or tinfoil, if you do not see the subversion). So, yes, Stoneleigh is probably perceived by the police (and higher up the chain) as a revolutionary whom they want to suppress because she IS telling the truth, lectures on it and discusses it publically. In times of universal deceit, even saving NGMO/organic seeds for farming could be seen as a revolutionary act because it opposes the scenario of corporatocracy and Monsanto. (The documentary film "Food, Inc." covers this well.)

Jean, perhaps you need to read a bit of Noam Chomsky to understand anarchism.

My assessment of Bill Gross and PIMCO is as follows. PIMCO ran away from US Treasuries in 2009 as they feared a collapse of the dollar. The dollar weakened but did not collapse. Seeing this, they realized that the dollar was going to appreciate so they dumped Euros and European bonds starting late last fall and into early 2010. This got them some nice profits buying Treasuries which have since appreciated in value (dropped in interest rates).

I believe that PIMCO is now locking in more US Treasuries as a defensive move to protect capital. If the dollar is the last currency standing, then it would make sense to hold Treasuries. And if the dollar collapses, no currency will be safe. At that point you need land, supplies, tools, etc. to get through what happens. So the move to Treasuries makes good sense if they believe that other currencies are more at risk than the US dollar.

Further, since Gross is connected to the Washington gang, this would seem to be indirect validation of the threat of deflation, plus indirect validation that the Fed will not allow a hyperinflationary event (because that would destroy both the Fed and the very banks that the Fed represents).

Ilargi -- are we not supposed to link to your site? I started up a conversation on iTulip since they have an inflationary bent and I wanted to see the viewpoints espoused there, but I got a message that the thread had been killed at your request.

WOW. Matt Simmons dead.Thats a strange coincidental one.I've just been thinking lately how wide of the mark some of his recent predictions have been, still, "twilight" was my first sojourn into peak oil and was one of the catalysts that set me on the path I'm on todayRIP

"joelandsonia said...Ilargi -- are we not supposed to link to your site? I started up a conversation on iTulip since they have an inflationary bent and I wanted to see the viewpoints espoused there, but I got a message that the thread had been killed at your request."

I had no idea what was going on, since I have no access there. What I noticed was a link to our freely available content that was located behind someone else's paywall. Which, in principle, I don't feel is correct. I had a run-in with chrismartenson.com last year on the same issue. If I could see what's behind those paywalls, things might be different. But I don't. iTulip just contacted me to say one of their paid subscribers put up the link. Which, obviously, I didn't know.

I was discussing today's post with Aaron and Tony at ML-Implode-o-meter just now, and thought it might be useful to post part of it here, since it explains -once again- what Stoneleigh and I mean when we talk about inflation and deflation.

=============

There's a lot of misunderstanding of the term (inflation) out there, that much is obvious.

So let's put it this way: in inflation were rising prices, then all Bernanke and Geithner would have to do to combat deflation is raise sales taxes on all products sold in the US.

Prices would rise, and deflation would thus be defeated. (Since if inflation would equal rising prices, deflation must equal falling prices.)

But we all feel intuitively that this cannot be true. (And if we don't, perhaps we need to wonder why Washington doesn't raise all taxes.)

So we have to admit that inflation can't be the same as rising prices.

Prices can rise because of inflation, but they can also rise through other causes.

Along the same line, in a deflation such as the one we've entered, many governments, companies and individuals will try to raise the prices for their goods and services, simply because they notice their incomes going down, and try to make up for the losses.

But that, too, is not inflation.

Inflation is a rise in the money and credit supply, (mostly) combined with a rise in the velocity of money.

If your favorite cookie baker falls ill and there's a cookie shortage in your street, prices are likely to rise. But that still doesn't give us cookie inflation.

That, too, we can all intuitively understand.

Nobody wants to talk about cookie inflation, but they're all too eager to discuss price inflation, even though that's an equally absurd and meaningless term. Or consumer inflation, energy inflation, you name them. All devoid of real meaning.

US money supply, as measured in John Williams' -shadow- M3, is falling at 7-8% annualized. Where the velocity of money/credit is going, I need not explain. Ask your intuition.

Well, there's a relatively simple way out of liquidity traps of this kind, but with a "not so simple" precedent. That precedent is to read the facts as if we lived in a "physical world" rather than a "tricky unresolvable jumble of information world".

Keynes pointed to the answer quite clearly, as did Boulding, both of whom could have only seen it by being systems ecologists first, and economists second. I've tried to get any of you information theory nuts to consider the possibility for decades too... It makes a huge difference.

This is malarkey. We do work with electric transmission and distribution systems and such a headline is nonsense. Blackouts are NOT "skyrocketing". Many systems have improved reliability in the past decade. This is MSM sensationalism at its best/worst.

Note that the link contain the word "smart grid". All the multinationals involved in the electricity industry are peddling all sorts of extremely expensive hardware under the moniker "smart grid". The supposed benefits are primarily two fold: have a "self healing" grid that can respond and recover quickly from a blackout incident or prevent them from cascading and also to enhance the ability of the grid to accommodate renewables (wind, in particular, presents very serious operating challenges).

Its just like the GWOT... make people afraid that the grid is a crumbling mess and it requires hundreds of billions of new investment (which will be willingly paid by unemployed ratepayers), supplied by the multinationals and paid for with generous tax credits and public subsidies.

Some facts to keep in mind... while we have experienced new system peak demands during this hot summer, IN GENERAL, demand is down because of the re/de-pression, just like oil demand is down. I think there are just too many unemployed people watching their 52" plasma screens with the cheap Home Depot window AC unit chugging away, giving us the 2010 summer all-time peak demands.

Remember, places like Germany have 1/3 the per capita electricity consumption that the US has. Even when you take in climatic differences, they simply use MUCH less, even with a pretty vibrant manufacturing sector (which the US has "decimated"). The depression will halve demand eventually -- people will turn off the AC because they have to eat. Think of Baghdad summers.

Needless to say, I do think the grid will eventually become semi-collapsed and outages or blackouts much more frequent. But there is a lot of redundancy and as demand drops off a cliff (not the 15-25% we saw in 2009), the number of work-arounds to keep the lights on are much more available.

Niall Fergusons comments cited in today's blog are expanded and expostulated nicely in his seminar at the Aspen Ideas Festival this summer. The link:http://www.aspeninstitute.org/video/aif-2010-financial-crisis-will-it-lead-americas-decline

I like your 1989 Argentina example. It looks like a real fly in the ointment for the deflationistas. According to TAE theory, a debt crisis with fiat currency and a functioning bond market shouldn't end in hyperinflation. According to TAE theory, attempts to print one's way out should spike interest rates and precipitate mass debt default and deflation. Your example shows that's not what happened in Argentina in 1989. The Argentina 1989 debt crisis and hyperinflation is exactly what the inflationistas are warning about. History shows the outcome is not as simple as TAE has presented it. Grab some gold while you still can!!!

I am not an American so am wondering what Americans think about the taxpayer picking up a $375,000 tab for a birthday present for a 9 year old girl. Hello-o-...Whoops, the White House says that actually the taxpayer is picking up the $375,000 tab to comfort a grieving friend of Michelle Obama. Whoops, that can't be the true story either as Michelle dumped her greiving friend to have lunch with someone else.I do shake my head. Is America so rich to spend such largesse on a child? What message does said child get about her worth. No doubt she feels exceedingly special and loved by the American people.She might even think that she is a princess.Looks like Harvard, along with environmental science, missed common sense in its curriculum.One might think my comment is off topic but it is not. How gov'ts spend tax dollars is very on topic.

Thank you for so clearly describing what is inflation and what is not. If only our mass media hacks understood and and desisted from referring to every cost of living index rise (no matter how manipulated it may be) as "inflation". That irritates the hell out of me!

@pfh No need to be so coy. Enough of the oblique references, just say what you mean. Otherwise you end up sounding like someone who's more interested in massaging their own ego than engaging in constructive debate.

The deflation/inflation argument at this point is sort of a red- herring. Both 'flations require public participation (they are social as well as economic events) and the public is saving not spending.

Inflation is people as a group spending and deflation is not. It's that simple.

Hyper- inflation is a currency phenomenon rather than a credit phenomenon - credit by its existence is a hedge against hyper- inflation and any inflationary 'money' expansion/increase represents capital shifted into credit. With electronic accounts the ability to shift funds into credit and credit- assets is virtually unlimited which makes hyperinflation - outside of risk assets - virtually impossible.

The amount of non- collectible credit any inflationary currency flows as liabilities are insignificant as measured against the (bad) assets. This means that inflated risk- asset 'values' are defaulted without effect outside of the risk asset markets; funds are created in a building named 'Fed' and destroyed in a building named 'Stock Market' across the street.

Stoneleigh understands the 'nightmare scenario' where oil production is constrained by too- low prices; oil production represents 'sticky prices' as the time to bring oil to market is a multi- year endeavor. As a consequence, the incresing real value of the (oil- pegged) dollar does not translate into increased production as ordinary deflationary analysis might suggest. Production 'investment' is simply another kind of underwater loan ...

The bond market is likewise constrained; the US is too big to fail, the markets (all of them boot in the US and abroad) are money laundering processes and participants will not rock the boat as long as they believe they can trade illiquid securities to the Fed for real cash sometime in the furure. The smart money is out of these markets, the dummer money is waiting and they can afford to be patient.

This means a 'waterfall' debt collapse is not likely as long as the Fed can introduce cash into the finance sector which it has proven the ability to do. Meanwhile, the 'real' economy can trundle along in denial until it runs out of gas ... literally.

"[..] why was the Argentine government in the 1980s able to resort to inflation to attempt to pay its debts."

In a few words: you answer your own question as to why the outcomes were so different in the two crises; still, don't let's forget there's always many factors that play into such matters, and simplification can be perilous.

So, for those few words: In the 1980's, Argentina lacked the -relative- dependence on international markets that the dollar peg very much forced upon it in 2001, when there was no room left to move but down, so to speak.

Compare that with the present-day American dependence on international money/credit markets to keep the mighty ship of state afloat, and things look, I would think, real clear.

The US has long squandered away its financial independence, and therefore the option of printing itself into hyperinflation. And I'm not saying it would in the present circumstances choose that road if it were available, but that's an obsolete point: it isn't.

And OECD: if there's such a thing as a TAE theory, you don't understand it.

We have always maintained that hyperinflation may be down the road for the US and many other nations, but not until deflation has run its course, and international credit markets have ceased to exist in their present form and magnitude.

Argentina 1989 very much proves our point, instead of refuting it. Hyperinflation can only occur in nations and economies that exist in a relatively large degree of isolation. The US doesn't fit that picture, just ask the Chinese.

Re: the danger of blathering on teh Internetz tubez (which must have been the first comment on the thread, which was clawed back, so I'l have to infer from what other people have said. The NSA knows what it was, Jean, just not the rest of us average schmoes...)

I'm not worried about what I say on the 'Net. That's because I'm a nobody. What I say matters naught to TPTB because I am so far below their level of concern that I have freedom. The elephants care not about the insurrections of cockroaches. Therefore, I speak out unafraid, except for not writing shite like "I'm going to crash a hijacked Cessna into Air Force 1 when President Obama goes for a speaking engagement in Muncie Ind. on Feb. 30 next year." Which I just said. Eat it, NSA.

If someone was to run for Congress, or get enough people together to start some sort of an anti-establishment citizens' movement, then TPTB might be motivated to troll through their electronic past to see what dirt it could find on them. And even then it would be more likely to be used for blackmailing and subverting any noble aims that person had, rather than Spitzering them.

For all the valuable consciousness-raising I&S do, I don't think they're on TPTB's concern list either. Truth-speakers with a few tens of thousands of readers amount to nothing when it comes to affecting the plans of the power-sphere. If anything, Internet yabber on sites like this is a good thing for TPTB, because every minute I spend hammering on my keyboard is one minute that I'm not plotting with my violent anarchist anti-globalization group about how we're going to drive across the border and set off propane bombs in a Wal-Mart in Nooksack, Wash. Eat it, NSA.

In fact, to the extent that Internet chatter is monitored by whatever humans -- more likely word-pattern recognition algorithms -- it's to monitor what's happening. TPTB LIKE it when people speak openly, because they can't listen if we're not talking. It's like why it's better to encourage mosques to be built rather than drive Muslims underground. Harder to spy on them then.

Lastly, I think people overestimate the competence of the government spy-spooks. Perhaps everything that's ever been scribbled on the Internet is stored out there somewhere. But how do they find it?

Before a policeman in your town knocks on your door and asks you to come down to the station because there are some questions we need to ask you, a committee will have to decide on your fate. Orders will need to be passed down a chain of command through several layers of the oppression bureaucracy. It will have to be fit into an OppressionOfficer's daily work schedule.

A human somewhere will have to write code on a keyboard that will retrieve specific bits of your dangerous info from some giga-teraflop storage system. Is that server farm working, or are there technical difficulties that prevent access until next Tuesday? Are all the keystrokes in the code correct?Did they misprint your middle initial? Since you wrote those seditious comments 10 years ago, has the tracking-ID format changed from your Social Security number to a 26-character dataset that must include numbers, special characters and capital letters for security? My wife used to write computer code for a fairly straightforward university employee benefits system, and she had mega-difficulty blending and updating old systems with new databases every time some new contractor would bribe its way into getting the university's business for the next four years.

The System wants us to believe that it's omnipotent. But as we've seen with Hurricane Katrina, the Gulf oil volcano and any number of terrorists who have slipped through the supposed security net, it's got two left feet and they're both made of clay. I'm not worried. Eat it, NSA.

Stoneleigh's opening was most solid today, and I find myself agreeing with it, but many fallacious inflationary memes are just easier to contemplate for most pundits, there seem to be emotive biases towards them.

From the economic history of Argentina wiki:"When President Carlos Menem took office on July 8, 1989, the economy of the country was in a critical state: Argentina had piled up a US$ 65 billion external debt (with payments in arrears), domestic credit and the monetary base had evaporated, and output was plummeting. Inflation, which had averaged over 220% a year during the 1975-88 period, reached 5000% in 1989; prices tripled in the month of July alone. GDP per capita had fallen from its 1974 peak by nearly a fourth and real median wages by around half."

This could be a revealing case to analyse and collate from various perspectives on monetary causation, perhaps there are deceptive dissimilarities that would allow for radically different outcomes.

@Zanderdon't be baffled, the oil's still there, submergedly dispersed. According to the latest satellite images most of the surface slick is indeed gone, quicker than expected, some oil has entered the gulfstream and was spirited away, the smallest fraction was skimmed up or biodegraded, while most of it got caught up in the dispersant maelstrom and remains hidden. The 75% figure is clearly another audaciously blatant lie, to end your bebafflement, what they suggest is positively completely impossible, not just government-grade untenably improbable.

The continued official ignoring and downplayment of established public health threats, mainly toxicity saturation and the resultant mass poisoning that has very likely occured in select coastal areas, is becoming more than baffling. Such repeated and coordinated instances of misconduct and negligence does shift the burden of guilt towards full criminal culpability or perhaps even treason or attempted genocide on some authorities part, depending on divergent mortality foreknowledge and providing the natsec arguments against public awareness by the false primacy of mass panic prevention are retroactively rendered invalid.

I do wonder when people like Karl are going to finally admit that the same mathematics that they believe forces these massive cuts they're calling for means, also (and in the same breath), cutting the US population.

I'm not concerned for the opposite reason: They WILL come for me for what I say on the Internet, because, to them, the only reason I haven't been arrested again is because I haven't shown up at Michael Vick's NFL practices or Tiger Woods' mistress' door or whatever.

But make no mistake: For all realistic intent and purpose, I am certain that I have been monitored as a "terrorist" (in either the purely criminal form of the word or in the post-9/11 form) since 1997, if not earlier.

People considered "kooks" get that kind of attention.

One of the reasons I am certain I'm either dead or in prison -- 12-18 months maximum.

I've been surfing around to see what the take is on Matt Simmons death. Drowning in his hot tub or heart attack; autopsy pending Some are saying he was short 4,000 on BP but that's no reason for suicide. Consensus seems to be there's something rotten since he's been the loudest voice against the MSM & Gov on the remaining oil, contrary to their "75% gone" dog & pony show.For anyone who doesn't know, Mr. Simmons is respected in the oil biz & he's been saying the wellhead is toast & their is a bigger leak a few miles away. Supposedly the research ship Thomas Jefferson has data to confirm this.IMHO Simmons might have uttered some "out there" claims, but most of what he said is in line with the secret, awkward and totally unprepared manner in which BP has conducted itself throughout this mess. What really concerns me now is that I don't see the MSM asking any questions as to why the hell they didn't cap this thing months ago? If all it took was sticking another BOP on top of the ruined one, why wasn't that tried first?

I said awhile back that I wasn't going to post anymore comments here because I was heading off in a different direction on my online studies; however, I found myself just this morning with a burning question. Not surprisingly, it's related to today's topic...

Since I've never taken an econ class before, I've no clue whether this one is any good or not. However, while sitting through the first lecture I hear the instructor telling me the textbook was written by Ben S. Bernanke ("Yes, THAT Mr. Bernanke...") and then he proceeds, some minutes later, to define deflation as a decrease in prices.

I'd love to hear what another instructor from a different school has to say for comparison, but can only afford OpenCourseWare priced curriculum.

Does anybody know of other educational options besides simply blogs???

In short, it said BP was applying for a permit to drill TWO wells not one. Says so right on the application. Well 'A" and well "B"

Both to be 'temporarily drilled & abandoned" in the language on the permit.

One, well "A" from 4/09 to 7/09. And the other Well "B", from 4/10 to 7/10. Both to be completed within 100 days of starting.

Both wells also included co-ordinates where they were to be drilled, not global latitude and longitude but relative to the rectangle plot in the lease permit.

He shows the live feed from the ROV that BP was spoon feeding the Public as The Well Head leak and points to the upper left part of the screen which has the ROV's co-ordinates. They match the drilling application co-ordinates 99.9% meaning the ROV, and the BOP/leaking well head to be at the Well "A" co-ordinates in the permit app.

Funny thing though, Well "A' on the permit was suppose to be finished and abandoned in 7/09 of last year. The other set of co-ordinates for Well "B" are NOT being shown by any ROV. He asks where the hell is Well "B"? What is at the second set of permit co-ordinates? The second set is where Matt Simmons said the real leak was.

Starcade now at Wherever, haven't you been expecting the same imminent personal doom for years now? For as long as I've been reading this blog, you've always believed the axe was just about to lop. Hasn't happened yet, eh?

Take an Ativan. Relax and revel in your unimportance! (No offence meant -- I am unimportant too.) We who have no power are not worth the powder it would take to blow us away. That makes us free, as free as unseen rats who have the liberty to run anywhere they want on a sinking ship.

We cannot control the ship, which the captains have steered into an iceberg. But we can scuttle around the decks unobserved while the important ones frantically try to reverse course, and maybe a few of us can leap into lifeboats. Think about how you might jump, not how you're going to fall.

great posts.I agree, I wallow in my anonymity, after all, a glance up at the sky on a clear starry night reveals the insignificance of us all. TPTB have delusions of importance but it's a great feeling to know how very wrong they are. We mean nothing in the great scheme of things.TPTB are irrelevant to me, I'm irrelevant to them and that's just the way I like it.Que sera, sera

I'm off to answer the door now, there's five men in black suits and sunglasses knocking on it.(funny, its dark outside??)

" IZ said...Kindly address the issue of inflation in some areas and deflation in others."

They don't exist. There may simultaneously be rising prices in some goods, and falling prices in others, but that has nothing to do with inflation or deflation per se.

Deflation will in time bring along lower prices and wages overall, but, as I said above, some times will become more expensive as parties seek to make up for the income lost to deflationary tendencies.

Look for governments to raise taxes everywhere they can, and action that will aggressively deepen the negative effects of deflation.

Still, higher taxes are not a sign of inflation anymore than rising cookie prices when your baker's taking a holiday.

Cameron in the UK is going after welfare cheats. See:www.bbc.co.uk/news/uk-10922261

Fascinating is it not that the poor are the real cause of Britains fiscal woes. Perhaps the credit firm "Experian " could recover more money for the gov't by tracking the bailout/bounus boys.And how much money did Esperian donated to the political campaign?I do wonder as well what with the rumours of fraudulent practices by credit firms why Cameron would turn to them for salvation.Sad day when corporations are paid for piece work, paid cash on the barrel head for each impoverished head on a platter.Nice distraction though from MP expense reports, from selling access to princes...Lesson learned- If you are going to cheat cheat big,not small.

I'm having a sleepless night. My cat, Maya, is ill and spending the night at the vet hospital! Surfing the net to pass the lonely worry time...Reading that Obama,in his fund raising speech in Texas, is still blaming Bush for US economic woes. Jeez...will someone ask him why he kept on Bushes economic advisors? Is that it? The democratic platform from now to November...wonder what it cost to get in the door to hear that tired old refrain? No change to believe in here. Move along....

Many commentators here blaze away with righteous fury at the "evil-doers" in our financial system. The blissful underlying assumption to this careful analysis is that alternatives exist to our present course of action.

Nonsense. Most of you are every bit as delusional as first time home buyers.

The credit system we've built has an internal logic that precludes all alternatives. As Stoneleigh has explained many times before: There is no route to salvation here. All options have been extinguished. As Spinoza explained long ago, the future is already determined. The ponzi system will continue on its present course until it collapses under its own weight. We all benefited (whether we admit it or not) on the way up, and we'll all pay for it on the way down.

The mere fact that you're allowed to complain openly and freely about all the supposed injustices of the system is evidence of how you've benefited. When in human history have peons been given the right to openly whine with no crackdown? Not too often. Exactly.

So wave goodbye to the righteous fury and moral superiority complex. Any attempt to deviate from the system's path would not alleviate suffering. It would merely bring the system crashing down even faster. And when it does come crashing down, you'll wish to the high heavens that someone could have postponed the reckoning for just a few more weeks or months.

Don't worry folks, you'll get your hellfire and brimstone soon enough. You just won't be permitted to complain about it when it arrives.

You want to prepare for the future? I'll give you preparation: Fermez votre gâteau trou

The oil is still there. As it is heavier than water, I am of the opinion that large quantities are still wobbling around at the 'bottom' of the GOM. If the material from the discharge event behaves like oil generally behaves in a marine environment, a portion of the discharged oil may have also formed a fine 'mist' of droplets that are dissipating and being caught up in ocean currents.

It will get 'less toxic' over time, as the organisms which evolved the ability to feed on gloop of trillions of dead things eventually break down the longer chains and complex rings that form crude oil.

For those who have expressed concern over what happened in Montreal, I don't think it's anything to worry about at this point, although it is evidence of a change in mindset. There will certainly be far more paranoia and ridiculous over-reactions in the future.

We had a small meeting room booked for the talk, rather than the large auditorium where they would normally host talks (for much larger audiences than I would attract, certainly at short notice). The library got a few calls from people who had seen the details posted here. Following up on those enquiries they would have seen TAE for the first time, and I guess it came as a bit of a shock to the unititiated. They probably associated the content (on a quick scan, without engaging brain) with the G20 protests from Toronto not so long ago and got worried.

They probably also thought we should have booked the overly large and expensive auditorium (for their benefit) rather than the free meeting room we used. Since we weren't paying for the facilities, they probably felt annoyed and decided to make life difficult.

I very much doubt if the concern went any higher up than the library managers. This was petty bureaucratic paranoia, not any kind of official involvement, even at the municipal level. I don't think we're on anyone's radar. Eventually TPTB will worry more about people hearing what we have to say, but not yet.

you've said a number of times that the bond mkt will punish the Fed if they start to print. well, they have been printing over the past 2 yrs, approx. 1.5T on their balance sheet and probably much more hidden. but interest rates have done nothing but go down.

The fed is not printing physical currency. It is trying to stuff more credit into a system that is already choking on it. Monetizing debt is not having an inflationary effect because it is not increasing money circulating in the economy.

The Fed's role throughout its existence has been to midwife credit, but its ability to do so depends on the willingness of borrowers and lenders to participate in credit creation. The banks that the Fed has been propping up are not willing to lend, and borrowers are increasingly maxed out. The engine of credit expansion is broken, which means that the Ponzi scheme has reached its maximum extent.

The bond market would punish any government actually printing currency. Weimar Germany and modern Zimbabwe are not examples of credit expansions, but of actually currency printing. Neither hah/has access to international credit, so printing was/is their only option.

We too may face a currency hyperinflation once the period of deleveraging is over and the international debt financing model is broken. That is a longer term issue however, and people need to navigate the deflationary deleveraging period first. The bond market will still retain its power for a number of years I would think.

and to say that the Fed follows bond yields doesn't seem to be quite right. when Bill Gross and Gary Shilling say they are buying T's b/c the know the Fed is going to keep the short end of the curve at zero, implies to me at least that they "anticipate" or "front run" what they think the Fed will do. which is the cart and which is the horse?

It's interactive, rather like quantum physics, where the observer is not independent of the system. Effectively, the bond market is in control. Debt-junkie governments beyond the point of no-return cannot decree that they should be able to borrow at a low risk premuim. The dependence on borrowing is so enormous and entrenched that no government is going to risk being cut off by printing.

In the US I would not expect interest rates to rise imminently, despite the obvious risks, because in a high-risk world the US is likely to be perceived as the least worst option. Risk perception is relative. Being perceived as the least worst option can actually mean very low rates for a while. It should mean the US should not have trouble borrowing initially in comparison with others. Capital flight to the US on a knee-jerk flight to safety should help as well. It's not a long term scenario, but it should get the US through a year or two.

However, real interest rates will be much higher than nominal rates, so the country will remain in the liquidity trap, where even zero is not low enough to reignite borrowing and lending.

We have a few examples in the modern era of debt monetization: Japan, England 09, and US 09. Did the bond market restrain their actions? It didn't seem like it. Likewise, in Weimar Germany, did the bond market stop the central bank at that time?

The distinction is between the printing of phycial currency and the monetization of debt, and it makes a critical difference whether a country had access to international debt financing as an option.

Without access to international financing, governments have no choice but to print. The debt-pushers have no power within a country they do not lend to, and therefore control, just as drug-pushers have no control over those who are not addicts.

Debt monetization (as in the Japan, UK and US examples you cite) does not increase the effective money supply in a deflation. Credit destruction proceeds faster, and the lesser amount of credit created does not end up circulating in the economy. Banks are sitting on it.

The velocity of money is decreasing, aggravating the contraction of credit. The money supply is falling, and of what remains, less is circulating. This is a vicious circle - a spiral of positive feedback to the downside. The scarcer money is, the more it will be hoarded by those who still have some, as is perfectly logical from their perspective. Being cautious about spending when future earning ability is looking increasingly precarious makes perfect sense, but that which individuals and companies must do dooms the larger system that much more quickly.

Another great offering from YouTube is the clip from Monty Python's - 'Always look on the bright side of life'.The link is at 'The Galaxy Song'..You'll have to find it yourselves since I have no idea how y'all put the link directly on to this site (computers not my forté!).....

Ahimsa,

Now that I am back on Terra UnFirma in the US of A, I just rented 'Food Inc' a couple of nights ago. Have been hearing about it for ages. Everyone should see this film. What a scary eye opener and what a tragedy of epic proportion for the animals.

Some facts to keep in mind... while we have experienced new system peak demands during this hot summer, IN GENERAL, demand is down because of the re/de-pression, just like oil demand is down. I think there are just too many unemployed people watching their 52" plasma screens with the cheap Home Depot window AC unit chugging away, giving us the 2010 summer all-time peak demands.

Power systems were my bread and butter for a long time. Demand is indeed down, and has much further to go as we fall deeper into depression.

The depression will halve demand eventually -- people will turn off the AC because they have to eat. Think of Baghdad summers.

Exactly. Having visited America a number of times, I know how attached people are to AC. It's all about what you're used to. I wear a sweater in many American homes when it's 30 degrees Celsius (about 86 F) outside. At home I just a have a few fans in the house. Where I was recently in Italy, people don't even use those, and Milan is a very hot/humid place.

When there are hard choices to make between AC and other essential spending priorities, people are going to have a hard time. I suggest that very AC-dependent people consider moving to somewhere with a kinder climate. At least it is one factor to bear in mind.

Fans use very little energy in comparison, and make a very large difference to comfort level.

Kindly address the issue of inflation in some areas and deflation in others.

I'm not sure whether you mean different geographic locations or different sectors of an economy. In terms of geographic locations, areas which have experienced massive Ponzi credit expansions, we will see deflation as credit collapse crashes the money supply. In areas isolated from international debt financing hyperinflation is likely.

In countries where currency risk could be a real issue (ie their currency could plummet against the USD or euro for instance), the price of imports, as denominated in their currency, could shoot up. This would not be inflation, but people who think of inflation as rising prices would call it that.

In terms of different sectors of the economy, price movements will not be even. Most prices will fall in a deflation, but price support will vary in time and space, depending on how essential a good or service is. Some prices could even rise despite a collapsing money supply, if the item in question is significantly scarce and important. Oil in a few years time would be a prime example.

Money supply changes are the primary driver of prices, but not the only one.

I don’t know where or when this concept, (Energy return on investment (EROI)), first appeared.I know that the oil drum is a strong advocate of it.Unfortunately, this concept only applies in an ideal world.It will not come about in my lifetime.

The BP expenditures for the oil spill are over $6B.Was it an Energy return on investment (EROI)?

No.

The war machines infrastructures have existed with humans since the beginning of time.Is war an Energy return on investment (EROI)?

No.

Sending raw material across the ocean and transforming them to a finished product to be shipped back to me for consumption is not an Energy return on investment (EROI).

On a personal level, I drive to my community garden and I know that it is not an Energy return on investment (EROI).

If we wanted to live in a world of Energy return on investment (EROI) there would need to be a 90% decrease of the world population. There would need to be a destruction of our social structures. Eating within “100 miles” is not an Energy return on investment (EROI). It burns too many calories.At its lowest basic calculation Energy return on investment (EROI) must be getting more calories input into your body, (to live another day), than the calories burned to acquire those calories.

Energy return on investment (EROI) is a zero sum game. All living things prey on other living things in order to achieve Energy return on investment (EROI).

I realize that "Both Gross and El-Erian are publicly stating deflation is here." What I meant but said perhaps poorly was that their actions confirm this thinking. Quite frequently we see money managers say one thing (talk their book) yet do another. In this case, however, PIMCO is acting directly like deflation is their primary concern. And that is important because it's a case where words dovetail with actions, meaning that this is very probably what they personally believe. This is a case where we are witnessing belief translated into action, on a scale that most of us will never come close to experiencing. Thus, if PIMCO's leadership really believes deflation is the primary threat, that, to me, is a very big validation from yet another source.

With regards to the 'risk perception' of the US, I'm having a hard time conceiving how this could go on for another 'year or two.' The situation in Europe may supports this now, but what happens if the US engages in a new international conflict? With state layoffs approaching, services declining, etc., what happens to confidence in the USD when the US middle class starts to protest?

IMHO, all bets are off. Your advice to take immediate measures to insulate our families is very much appreciated; thank you.

Oh sure, Bernanke can cause a short-term rally in the market by mainlining more Credit Heroin into a screaming Junkie. For a (short) while. But not that each of his "prescriptions" and "pronouncements" of "extended periods" and similar claptrap has produced smaller and smaller gains over shorter and shorter times, exactly as does the "high" from drug abuse. Soon the junkie, with sunken eyes and emaciated jowls, comes not looking to feel good, but to avoid feeling bad, and the pusher provides not to provide a "high" but to avoid being killed by an enraged junkie suffering withdrawals.

We're there as a nation folks, and if we don't withdraw we will suffer the next fate.

As a junkie's habit becomes more and more about pain avoidance, he gets closer and closer to the "coffin corner." That is, the dose required to avoid the pain continues to rise over time (just as it is with these "unconventional" measures and credit "pumping") but there is a physiological point of poisoning. Should that point of poisoning be reached, of course, the body dies. As these two points converge the junkie is left with only two options: detox or die.

Yes, what we are experiencing IS the solution. Unfortunately it is bitter medicine for a people who expect never ending material goodies and eternal happiness from the boob tube. Yet this is what must happen for the economy to have any chance whatsoever to reach a stable, sustainable restructuring.

NOTE: I remain pessimistic about our chances of reaching that sort of outcome but it doesn't mean I don't hope that it might happen. In short, I prepare for the worst and hope for the best.

Bond Market gets nervous about US treasuries so demands higher yield.US needs to sell more treasuries to cover higher yield and this makes bond market even more nervous and demands higher yields and so on until we get deflation. Hmmmm, that does sound pretty scary alright! LOL.

"Yes, what we are experiencing IS the solution. Unfortunately it is bitter medicine for a people who expect never ending material goodies and eternal happiness from the boob tube."

I am grateful to TAE (40 Ways and the Lifeboat essay)for enabling me to wrap my mind around the situation. Still--when distraught friends chat with me about what they see going on, I tell them to think of it as "someone peeing in the pool." It's impossible to find a clean zone. It permeates everything.

Other than doing some basic preps (of which we'd have to put the entire universe in a backpack to be complete) the next best thing is to be psychologically prepared. For me, it's a determination to take the high-road with what befalls us. At least there will be courage/honor in that.

Accepting the current situation as THE solution seems to be a shortcut from denial to acceptance. So be it. I just find it futile to try to solve it as a problem. It IS. And here we are. Amongst friends ;)

Hyper- inflation is a currency phenomenon rather than a credit phenomenon - credit by its existence is a hedge against hyper- inflation and any inflationary 'money' expansion/increase represents capital shifted into credit.

Not really.

Hyper-inflation is a confidence phenomenon. When the masses lose confidence in the viability of any currency

. . . to the extent that they would gladly trade bushels of paper for a single apple . . .

no amount of digital 1's and 0's passed from one server to another will have any affect whatsoever in restoring that confidence.

Historically, once a people lose confidence in a currency, it is a finality. There is absolutely no way to regain that confidence in that particular currency again. The only way to restore economic viability is to introduce a new currency (or medium of exchange) which has widely-recognized value.

If it is not already planned, a robust FAQ section would be great in the new website. The primers are important, but sometimes they are overwhelming. In the past couple of days, both Stoneleigh and Ilargi have posted concise answers to specific (and frequent) questions. It would be great to see them collected. I particularly look forward to one of the categories being Cookie Inflation.

Well, john patrick, some of us never had to do the 5 stages of grief thing. The real problem is and was the accumulation of debt to support an unsustainable lifestyle. We're either at or very close to the end of that nonsense and that end cannot come too soon.

We face ecological issues on a scale that most simply appear incapable of even imagining. To address these we will need to be focused and we will need to maximize our savings (versus debt) and it will still likely turn out very badly. But going into it backwards, bare ass naked, and drunk on debt would ensure an even more horrible outcome.

Remember that reported incident where the government, being rightfully concerned about toxicity thresholds, directly and repeatedly ordered BP and its subordinate spraying company to cease spraying dispersant, only they didn't and refused?

The very instance that they disobeyed and continued spraying after being explicitly ordered not to, they surely became party in a grievous criminal act beyond criminal negligence. It may already be legally admissible for certain stateless entities which inhabit corporate personhood to then be qualified as an enemy combatant in totality, so being engaged in an act of chemical terrorism or open hostility committed with a hazardous chemical agent against the United States and its people.

The EPA has repeatedly misstated that corexit is no more toxic than oil itself, unduly dismissed any persistent public health threats as posed by various compounds, and has made insufficient effort to inform coastal communities or protect them from exposure. As such, the specific causal structure of the governments overriding mandate and obligation towards safeguarding public health may also place the EPA's malfeasance and collusion with BP beyond a state of criminal negligence, depending on incurred fatalities by poisoning and foreknowledge of such fatalities, whereby an act of premeditated subversion of justice in repect to gross negligence or criminal negligence, which has the (reasonably foreseeable) secondary effect of producing mass casualties or coercively impeding action that would prevent mass casualties, is then legally classifiable as attempted genocide by means of deliberate mass poisoning or conspiracy to commit genocide by such means, despite the primacy of any national security mandate whatsoever.

When all pricing movements are erroneously seen as a direct function of money supply, the expectations resulting from dynamic scarcity in currency or credit tend to supersede all conceptions of supply-demand functions inherent to goods and services, whose interrelations encompass more elementary economic functions than those constrained in monetary scarcity itself, such as in barter arrangements. Its astounding that financial journalists make this mistake so often.

I also appreciate the recent influx of those articles strongly affirming that the cause of taxes is love of the deficit, its good that people are made aware of this situation.

The historical significance of people seems to be diminishing with time, as progenitors emanating from the past have a definitive expanding influence on the present, but not reversed, and depending on how little future is attainable, our actions may indeed have no recordable effect on subsequent human events when those may never transpire, in a singular compactified ending of historical actionality.

Forthwith, all ideal things manifested in the continuum do remain equally causated and significant in perpetuity precisely because gravity is a recursive algorithm bounding the ends of the universe in proportion to its beginnings.

Why was Britain, an international debt junkie after WW2, able to inflate its debts away? According to I&S, an international debt junkie like the UK, at the knees of international creditors, should have been locked in a deflationary straight-jacket after world war 2. That obviously didn't happen. The economy grew and the pound was devalued and the creditors sucked it up with a smile and no spike in interest rates precipitating collapse. This was a clear violation of TAE theory.

And why have prices in Britain been rising across the board for months in 2009 and 2010? The British Govt. produces these price increases every time it raises the VAT. Mervyn King is being criticized due to inflation running well above the BOE target. TAE theory fails here as well. Explanations? None.

Bukko: And the same reason my personal doom hasn't come to pass is the same reason that it hasn't come to pass generally.

You see, Bukko (and that's only said because it's your moniker, not that I'm mad at you), the whole shooting match has been built on this same Ponzi Scheme/Bezzle/whatever you wish to call it.

It's basically the same kind of thing I want to impart on Karl's group: The mathematics does not allow the present population to be sustained.

And when TSHTF, one of three things will happen:

Either I'll be killed for what little I have left.

I'll kill someone else, because I've wanted to for some time (and, believe me, there are more than a few).

or I'll be felled in generalized disorder. If you believe for one second that cutting off the dole checks is not going to result in the major cities of this country going up in a heartbeat, you're more optimistic than I am. One dollar out of six in income...

The fact I'm still here is the same as the fact we are still "civilized" -- the act is not finished yet, and some of us underestimated their ability to keep the plates spinning.

Debt monetization (as in the Japan, UK and US examples you cite) does not increase the effective money supply in a deflation. Credit destruction proceeds faster, and the lesser amount of credit created does not end up circulating in the economy. Banks are sitting on it.

The lesser amount of credit created created (in US 09) via newly monetized debt DID end up circulating - the USG spent the money from the new treasuries right into the economy paying salaries and buying real goods & services with it. The banks had no opportunity to "sit on it" at all.

In the case of US 09, I agree the speed of deflation did exceed monetized debt creation, but one might imagine a situation where net new government debt bought by the Fed exceeds deflation of bank credit. This hasn't happened yet, but not because of a lack of capability, just a lack of will.

It would appear that the debt markets did not intervene to stop the monetizing of debt in the US 09, based solely on watching the price of debt during the monetization period. Its possible the monetization was not large enough to cause a reaction. A better case could be made not by the debt markets, but by the currency markets - the dollar started dropping right after the announcement and fell for nine straight months.

Left unaddressed is my goal of obtaining a consistent study of the different longer term monetization cases and how effective the international bond market was historically in restraining the monetizer. I realize that's not something you can just cook up in a 5 minute response, although I was kind of hoping you might have it lying around somewhere. I have to do more work of my own and find more cases that will either reinforce or weaken the "impossibility of inflation in this deflationary environment until deflation has run its course" claim, which is central to all your recommendations on how to protect yourself from what you see happening next.

I have to say that through your work my understanding of these matters is much, much clearer than it was, and I want to express my appreciation for all you have done.

To figure out if we're in deflation or not, we have to examine net bank credit and compare that to net money printing, since bank credit represents the bulk of money in an economy. Perhaps during that period of time in the UK, bank credit was increasing, not decreasing, so no deflation would have occurred.

Your point regarding the bond market is interesting, however. This same thing happened in the US during that period as well. Bondholders were creamed; it was a bad time to be holding bonds, as the US inflated its way out of its war debt. Perhaps we can ascribe that to an excessive desire for safety; after the depression, return OF capital was paramount, so investors continued to pay a premium for it.

We can see that same thing today in treasuries, I believe. However there is a currency dimension today; foreign holders of treasuries are sensitive to currency moves, and monetization will most probably kill the dollar. I think the currency market in combination with the debt markets will likely act to restrain "excessive" printing (printing in excess of net credit destruction).

Starcade, I DO believe that when the bread stops coming, and people can no longer watch the circuses on TV/Internet because they're homeless or the power's off, there will be mass disorder. Starting first in Los Angeles (didn't you say you live in that area?) That's part of the reason why we buggered off from the U.S.

But every country will not undergo a violent collapse. And not all parts of the U.S. will go down. Everybody is not going to die, although many will, and many by their own hands. There will be pockets of decent descent.

What I like about Stoneleigh's philosophy on the upcoming downfall is her "lifeboat" recommendation. It's not about "Find a cabin in the mountains and hole up with your guns" but "Find some people who'll watch your back, while you watch theirs." Where we've moved, we've worked at befriending people with country property, hands-on skills and sensible attitudes. We've got talents and friendship to offer them in exchange. No one can tell how this will play out, but a network of friends will give us a better chance of living decently than a nest of firearms.

Can you do the same? In every urban area, there are community gardening groups, ecological organizations, political activists, etc. Is your personality such that you could link with something like these? Do you have a skill set that would help other people? Or would you even want to live in the kind of world that Jim Kunstler envisions as we go through "The Long Emergency"? Life in the grim world of the Afterscape won't be to everyone's liking, after all. If you want out, why fight it?

And Steve, I'm a hospital nurse. I suppose Adam Smith would classify me as "unproductive" labour. I am not a "primary producer" like a miner, logger or farmer. However, when society moves beyond the hunter-gatherer stage, especially with modern means of production so that a handful of "primaries" can produce enough material goods for the masses, there's a need for "secondaries" like me.

Did you consider how health care is part of the "social contract"? If people know they have a good chance of getting healed should they fall ill or get injured, they're more likely to buy into the overall structure of society. Ditto that with retirement benefits. If you believe that you'll get paid to keep living after you've stopped working, you're more likely to be a good citizen. If you reckon you'll just die when you become a "useless eater," you might say "Why don't I rob that bank? Why don't I just get drunk all the time? There's a riot? Cool -- I'm there, dude! My life isn't worth anything anyway."

FDR didn't coin the term "Social Security" for nothing. People like me are part of the "safety net" not just for individuals, but to keep the structure of society secure. If the coming world can't afford at good schmeer of what we do, then it's going to look pre-Roman in terms of its level of civilization.

So Robert Gibbs thinks the Left needs to be drug tested does he? Ha! He thinks we are crazy for calling Obama on breach of campaign promises does he?Hm-m...perhaps he's drumming up a gov't contract for a friend with a blood lab. Oh hell, Gibbs, why stop there. Drug test every voter before they cast a ballot. That should fund a campaign or two.Gibbs describes his comment as " unartful". Indeed it was as it pulled back the curtain for just a moment. We all had a wee peek.

Why was Britain, an international debt junkie after WW2, able to inflate its debts away? According to I&S, an international debt junkie like the UK, at the knees of international creditors, should have been locked in a deflationary straight-jacket after world war 2. That obviously didn't happen. The economy grew and the pound was devalued and the creditors sucked it up with a smile and no spike in interest rates precipitating collapse. This was a clear violation of TAE theory.

The fully developed form of international debt financing, plus the ability to pick the pockets of the rest of the world, was really a creature of the financial deregulation/globalization of the early 1980s (under Thatcher/Regan). Until then effects were much more localized, and countries experiencing local difficulties are somewhat insulated by a functioning larger system (eg Argentina and especially Japan).

Globalization added another trophic level (level of predation), greatly expanding the reach of the global elite into the pockets of even the world's poorest. As many people as possible were drawn into the monetized economy, enabling the surpluses from their labour to be effectively creamed off. The Green Revolution, and the successive GATT rounds, were part of this monetize-everything movement as well.

National economies that had been hitting resource limits, where excess demand for resouces had led to a wage/price spiral in the west and empty shelves in the east (the equivalent where prices are controlled at below the cost of production), were given a repreieve. Expanding the reach of elites temporarily (for a couple of decades) relieved those resource constraints.

The period prior to deregulation was marked by negative real interest rates, as wages and prices rose, but the rate of inflation rose faster. The scale of the expansion was, however, not on a par with what came afterwards (ie in the 2000s), as the full range of engines of credit expansion did not yet exist (eg derivatives, securitization etc). The result of the earlier period of lesser excess was the credit crunch of the early 1980s, where real interest rates shot up. The dynamic of this period, scaled up many-fold, is what we can expect to see again.

And why have prices in Britain been rising across the board for months in 2009 and 2010? The British Govt. produces these price increases every time it raises the VAT. Mervyn King is being criticized due to inflation running well above the BOE target.

As we have said many tmes before, price increases are not inflation. Prices rise as a lagging increase of monetary expansion, in this case reflaecting the temporary reflation that came with the rally. The real economy follows the credit markets, which experienced a rally lasting a year. The real economy should show a reversal shortly, now that it appears (on balance of probabilities) that the rally is over and the next phase of credit contraction beginning.

Left unaddressed is my goal of obtaining a consistent study of the different longer term monetization cases and how effective the international bond market was historically in restraining the monetizer. I realize that's not something you can just cook up in a 5 minute response, although I was kind of hoping you might have it lying around somewhere.

That would be a major research project. Perhaps when we have passed the period where warning people can achieve something, I will have more time for historical/theoretical studies, assuming I am not too busy just trying to make it from one day to the next as most people will be. I was an academic once, and such studies do interest me. For the time being, however, I need to concentrate on helping people to rescue what they have, hence the traveling.

As I said before, it is not so much restraining monetization, but actual currency printing. Monetized debt (additional excess claims to underlying real wealth) is disappearing into a giant black hole of credit destruction rather than getting into the real economy is any significant quantity. Actual currency does not evaporate like the virtual wealth that excess claims represent. That would be of much greater concern to the bond market.

“China has moved to liberalise its gold market further, increasing the number of banks allowed to trade bullion internationally and announcing measures that will encourage development of gold-linked investment products.

The move by Beijing’s central bank comes as the country’s investors pour record amounts of money into gold, in a trend that is becoming a significant factor on global prices.” China seeks to widen gold market FT

You, and many others, keep assuming that the politicians call the shots and that they will sacrifice the bankers via inflation to try to save themselves. Have you considered what would happen if that situation is reversed, as abundant data suggests it is?

Why would the banks (creditors) destroy the loans they have made via massive inflation? Why would the Federal Reserve, which exists first and foremost to represent the banks, choose to destroy itself by destroying the currency outright?

Inflationists NEVER answer this question when I ask it. They always resort to Weimar and Zimbabwe comparisons but those are inappropriate because the governments in those cases were the central banks. This time the central "bank" is a quasi-public entity whose real function is to protect the banks (especially the NY banks) behind it.

Deflation is IDEAL for these banks, especially if the central bank (the Fed) can monetize just enough debt to support the banks through the collapse of their loans.

You see, at its very basest level, banks have liabilities called deposits and they have assets called loans. All that they need to survive is enough cash to cover deposits, which are a tiny fraction of outstanding loans, due to fractional reserve lending.

What does this accomplish? Slow monetization to cover deposits ensures that runs on the bank are minimized while deflation ensures that the vast majority of REAL assets (buildings, land, factories, homes) end up in the hands of the banks.

Now I have reason to believe that this plan will not ultimately work but this is what I believe the banking system is trying to accomplish right now. And if the only cash the Fed NEEDS to create is that necessary to keep its member banks afloat in the face of deposit withdrawals, then the Fed can do that and it is still very deflationary.

In inflation, the debtor wins. In deflation, the creditor wins. The Fed represents the creditors. Now tell me again why we're going to see massive inflation. And please don't just repeat the Weimar and Zimbabwe stories. I believe the Fed actually has incentive to choose deflation over inflation. They simply want it to happen slowly, in a way that they can control, and that's where they may fail.

Hi there toall at TAE and in particular Stoneleigh (who,since I recently discovered via an audio from the2010 Transition Town Conference ) has become my biggest hero ( I would have said heroine but Im a bit dyslexic and didnt want to accidently make a refference to hard drugs.)

Ever since I came across the notion of peak oil my partner and I have pretty much dedicated ouselves to getting as ready as we can for the changes that are rushing towards us. We are also working hard to extend this out into our community. ( I was heartened to hear Stoneleigh talking about the importance of building trust while we still feel safe enough to trust each other.)

This may sound cheezy but then I guess I am. We were sitting out on our verandah eating breaky. The eggs came from our chooks , which are fed mainly from scraps from our neighbours, the bread for our toast was trded for some baking trays we rescued from a dumpster (we call them skips here but sane thing), the butter was left behind by someone who had stayed at our B and B, The orange juice came from my dads trees and the jam was made by my girlfriend during a preserving night she ran for our street using grapes we gleaned from a neighbours vine. The cooking was all done on a parabolic solar oven we just learned how to use. In the middlee of all this the 85 year old Italian lady (we pay her water bill in exchange for the use of some of her land) came by to let us know that she will be away for a few days so not to worry if we dont see her for a bit.

So anyway you get the picture. We are doing as much as we can and learning as fast as we can and stretching our community as far as we are able. I feel like Im living in paradise and yet at the back of my mind I know that what is cute now will soon become neccesary for survival. Here in Australia we are so insulated from the crumbling US economy that its hard to hold this as truth. I personally do even though all my mates think Im crazy .

Does anyone (Stoneleigh???please) have any idea what is in store for this, the most isolated city in the world???